'Phantom Jobs' Are Not So Illusionary After All

According to the top bloggers, prominent writers for major financial publications and some leading market strategists and economists, new businesses cannot be created in a recession. Pundits call these "phantom jobs." However, this can be easily disproven through an examination of the data.

Analyzing the labor market is not so different from analyzing the stock market. When the market moves lower, the pundits say, "There were no buyers," while on strong days they say, "There were no sellers." That's shorthand for "every trade has two sides": There is a buyer for every seller. On down days this means that the demand curve for stocks shifted and the clearing price is lower than before.

The economic system is dynamic -- we do not try to trace the effect on individual buyers and sellers. Instead, we look at the overall market effect. But instead of considering employment as a dynamic system -- where there are always businesses closing and starting and jobs are gained and lost -- market experts look at employment by focusing upon traceable and visible effects.

When jobs are lost, there are continuous trumpeted news announcements about layoffs: 15,000 here, 25,000 there. Job gains do not generate any announcements, however, mainly because they are in small increments in both existing and new businesses. The monthly payroll employment report shows the net change in jobs without giving a sense of the underlying dynamics. This results in most observers concluding that there is no hiring and no new business creation.

This widespread and seriously mistaken viewpoint also causes skepticism about government efforts to measure job creation. This attitude does not begin with data but emotion, and it has fostered a multiyear attack on the U.S. Bureau of Labor Statistics' (BLS) effort to measure accurately the change in employment.

The series on business dynamics started in 2002, but the reports extend back to prior years. The data are not from surveys, but state employment data. Since no one reports employment or pays taxes on phantom jobs, these are data that we should believe.

Data from 2001, the most recent recession year, show nearly 3 million jobs were lost during the year. This is a net result, subtracting jobs lost from jobs added, which were both over 30 million. However, more than 7 million jobs were actually added in opening establishments. In some quarters, there were actually net jobs added from new establishments, the difference between business births and deaths.

There is always job creation thanks to the invisible hand of the market. Sometimes unemployed workers are available to new businesses, which are always forming and are quite significant when people lose other jobs. This is occurring in the current economy: The market fixation on the widely publicized layoffs ignores new job formation. These jobs are the ones that come naturally from new, inexpensive resources, and potentially from the stimulus package.

Understanding labor dynamics is crucial in interpreting economic news, and will be pertinent in evaluating Obama's economic policies and the stimulus package.