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Resolving the Payroll-vs.-Household Debate

Editor's Note: This is a bonus story from Barry Ritholtz, whose commentary usually appears only on RealMoney . We're offering it today to readers. To read Barry Ritholtz's commentary regularly, please click here for information about a free trial to RealMoney.

A week after the disappointing July employment report, it is hard to imagine that some economists are still sticking to the canard that the household survey more accurately reflects job creation and economic expansion than the payroll survey.

Several economists -- with agendas ranging from "refusal to admit error" to pure partisan politics -- continue to claim that the divergence between the two surveys understates the true strength of the economy.

How significant is the difference between these two data points? Consider the recent July payroll data, which came in significantly below expectations, with only 32,000 jobs created vs. a consensus of 240,000. The household survey covering the same month showed 629,000 new jobs. This might make investors more bullish, if they did not fully understand how the household survey is different from the payrolls survey. About 92% -- 577,000 of the jobs in the household survey -- were part-time only. Further, these 629,000 jobs also included uncompensated family employees and agricultural jobs, which, by definition, are not included in the nonfarm payroll survey.

An objective review of the data thoroughly discredits the "household survey is stronger" rationale, which has become the last refuge of economic scoundrels.

For those of you less interested in drilling down through the economic data, consider these comments from Federal Reserve Chairman Alan Greenspan during his congressional testimony at the House of Representatives on Feb. 11: "I wish I could say the household survey were the more accurate. Everything we've looked at suggests that it's the payroll data which are the series which you have to follow."

If you choose to ignore the congressional testimony of the Federal Reserve chairman, than consider the source of these reports themselves: The Bureau of Labor Statistics has recently looked into the statistical divergences between the two data sources and showed why the so-called household/payroll survey discrepancy is in actuality a "non-issue."

Different Methodologies

First, let's review the methodological differences. It turns out they are quite significant. The household survey relies on asking people -- in person, at their homes -- about their personal employment situation. A total of 60,000 households are contacted this way each month, according to analysts I spoke to at the Bureau of Labor Statistics, Current Population Survey.

The establishment, or payroll, survey, on the other hand, takes data directly from 400,000 established employers, typically though a payroll or human resources person.

The two different data series are extrapolated out to produce statistics on the 129.9 million employed people in the U.S.
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