Navigating the Nonfarm Payroll Maze: A Guide to Economic Trends

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Christina Hageny

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September 13, 2023

This article is Tax Professional approved

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What is nonfarm payroll?

Nonfarm payroll is a term that may be familiar in economics. Employees classified in the nonfarm payroll category account for 80% of the business sectors that contribute to gross domestic product, or GDP. 

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As the name suggests, nonfarm payroll excludes farm workers, since the seasonal nature of agriculture can lead to inconsistent reporting. Farm workers may also rely more heavily on undocumented labor, self-employment, and family workers. Certain government workers, active military, and employees of non-profits are also excluded. 

Each month, the Bureau of Labor Statistics (BLS) releases data compiled from regular surveys in the form of the jobs report, or employment report – also referred to as the Employment Situation report. This report uses data collected on households and employers to give estimates of weekly worked hours, earnings, and unemployment rates of people on payrolls in the United States. 

BLS surveys

The two major surveys used by the BLS to present the statistics are the Household Survey and the Establishment Survey. According to the technical notes available from the BLS, these surveys interview 60,000 households and roughly 122,000 businesses, which covers about 666,000 sites and about 33% of the nonfarm workers in the U.S. 

To maximize the reliability of the data, the sample group for the survey includes businesses from all states and industries (industries are determined by the principal activity of the business as classified with the North American Industry Classification System, or NAICS), and about 40% of the sample is made up of businesses with less than 20 employees. Professionally trained field economists are responsible for collecting the employment data through a variety of methods, which include mail, email, phone calls, and even house visits. 

What data does BLS collect?

In both surveys, participants are asked to provide information about employment including hours worked, average earnings, and employment status for the period which includes the 12th day of the month being reported. However, the household survey is not strictly limited to nonfarm data and does not exclude the worker classifications such as self-employed individuals, farm workers, and unpaid family. 

Household survey data is subtotaled by several categories, including gender, age, education, occupation, and industry. 

Determining the unemployment rate

While the household survey collects many important and useful data points, perhaps the most significant product of the survey is the official unemployment rate. It’s important to note that the unemployment rate is not purely determined by individuals’ eligibility or receipt of unemployment insurance benefits. Instead, the survey determines unemployment by classifying people aged 16 and older who, during the period covered, had no employment, were available for work, and made efforts to find work. This allows the report to give a more accurate representation of unemployment. Alternative measures relating to employment are also reported, such as the percentage of individuals unemployed for 15 or more weeks, or people who are available to work but are not currently looking for employment.

The establishment survey

The establishment survey gathers data from nonfarm payroll that includes hours worked and hourly earnings, which is used to generate estimates of hourly and weekly earnings. The estimates are broken down by state, industry, as well as whether the employees are considered production or nonsupervisory employees. Adjustments are applied to account for estimates of changes in payroll caused by new businesses and closures of existing businesses.

The numbers from the surveys are adjusted for regular seasonal fluctuations such as hiring surges heading into the holiday season for the retail sector, as well as normal slowdowns in construction during the winter season. Although the BLS also shows the unfiltered data, accounting for these fluctuations may provide more meaningful information, and makes it easier to spot actual trends in the data.

What is non-farm payroll in economics?

The United States Bureau of Labor Statistics (BLS) puts together the nonfarm payroll data collected from the surveys to include in monthly reports. Information from these reports may be used by economists, investors, and policymakers to identify trends and determine strategies or policy changes. Being released monthly on the first Friday of each month, the jobs report provides current and relevant insight into the state of the U.S. economy. Although there exists the possibility of changes in a single month that may not be attributable to normal and expected seasonal changes, the report is still an extremely valuable tool when used in conjunction with other economic data and prior months’ reports.

How accurate is the data collected by BLS?

As with any data that is more or less self-reported by businesses and individuals, both the establishment and household surveys are subject to some degree of error. The sampling of the surveyed population can also contribute to some inaccuracies in the data and the information gathered may not always be representative of the true population values. 

Sampling or non-sampling errors may also skew data, due to certain segments of the population not being included, or the inability or unwillingness of participants to submit the data accurately and on a timely basis. Data is revised to account for late or incomplete submissions, and some estimates shown in the reports may be labeled as preliminary until final adjustments are made to the information. The BLS generally assumes a 90-percent level of confidence in regard to the data collection and analyses conducted in generating the monthly reports. 

Insights for economists and policymakers

Many users of the report might focus primarily on the unemployment rates released by the Bureau of Labor Statistics, and this makes sense considering how critical employment is to the economy of the U.S. However, the information contained in the reports can be instrumental in predicting impacts to critical aspects of the U.S. economy. The price of gold, the value of our national currency, and the stock market can all be impacted by the report’s findings. 

Economists and policymakers can draw conclusions and glean valuable information and insights from the other data provided in the report. Earnings data can be analyzed to forecast and anticipate inflation, while fluctuations in worked hours might be indicative of trends in labor demands. Furthermore, the groupings and subcategories of unemployment figures can be useful tools to show the progress that is being made by certain age, gender, or ethnic groups in the labor force. This information may be especially valuable for policymakers who are focused in areas such as diversity, equity, and inclusion (DEI). Monetary policy may be determined using information from this report in conjunction with other data from the Federal Reserve.

Reflecting global events

The Employment Situation report reflects how certain national or global events impact the U.S. economy and employment figures. An example of this is the data from 2020 that shows the massive decrease in activity and millions of jobs that were erased as a result of the global COVID-19 pandemic. Recently, data from the reports have shown that the economy has made significant recoveries as evidenced by the seasonally adjusted unemployment rate of 3.5% in July 2023, compared to the alarming rate of 14.7% in April of 2020. 

Accessing information

Reports, news releases, projections, and general information can be found by visiting the U.S. Bureau of Labor Statistics website at bls.gov. 

Nonfarm payroll data is crucial

Considering the weight of the information and insights provided by the Employment report, it’s easy to see why the U.S. nonfarm payroll data is so crucial to the Bureau of Labor Statistics. The reported nonfarm payroll data is an invaluable component of the monthly reports, and the accurate and timely responses from selected businesses and households are critically important in helping to make sure the reports represent the state of the U.S. economy.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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