Rise of the Off-the-Books Workforce

If you scrutinize the U.S. labor market numbers from the last two years of economic recovery, you’re left with what seems to be a paradox. Since the recession’s low point, in November 2001, the number of employed people 16 and older has risen, but the number of jobs on the formal payrolls of employers remains below recessionary levels.

The different numbers have conveniently provided politicians with a choice, depending on which points they wanted to make, but they’ve perplexed economists.

Some analysts have concluded that this gap must represent the different ways in which statistics are kept by the two main sources of national data on employment developments.

But here’s a more likely explanation. The number of people on formal payrolls remains low because new jobs tend to be ones that don’t show up on payrolls. Employment gains are among the self-employed and contract workers, or in the informal “gray” and “black” labor markets. People are doing temporary day work or contracting that’s kept off the books. These don’t tend to be highly paid jobs or jobs with benefits like health insurance, and they are often performed by immigrants, especially undocumented immigrants.

Each month the U.S. Bureau of Labor Statistics releases two sets of employment data. One set of estimates is based on a survey of households across the nation and reflects what people say about their employment status; the other is based on a survey of employers, public and private, who report how many people are on their payrolls. If you listen to what the employees say, civilian employment in the nation has increased by about 2.3 million workers in the last couple of years. But if you look at what the employers report, the U.S. lost nearly 800,000 jobs between November 2001 and November 2003.

It’s no surprise that the two estimates don’t match perfectly. When we looked at employment data from the first two years of recovery in the previous five recessions, we found that gaps were normal. But not on the scale we are now seeing. In those earlier recessions, the difference in the two sets of numbers averaged just 292,000. This time the difference is nearly 3.1 million, or more than 10 times the size of the gap between the two sets of numbers in other recessions we examined.

The tendency among those who use these statistics is to pick one survey over the other depending on methodological -- or political -- preferences and simply dismiss the findings of the other survey. But it’s important to try to understand the gap, because what it really tells us is that the nature of work is changing.

Consider self-employment. Between the fall of 2001 and the fall of 2003, an additional 500,000 people reported they were self-employed. Less easily measured, but still a significant factor, is an increase in employment of independent contractors not carried on the formal payrolls of firms.

Another trend reflected in the employment numbers -- one that may explain in part the increase in off-the-books jobs -- is this: There has been substantial displacement of native-born workers by new immigrants, especially in entry-level jobs.

Between 2000 and mid-2003, the nation’s labor force -- people who want to work, whether or not they’re employed, increased by about 3.8 million. Between 1.9 million and 2.1 million of this increase was attributable to recent immigrants joining the workforce. During the same period, the nation’s employment level -- the number of people actually working -- increased by only 900,000 among people 16 and older. Yet, by 2003, the number of immigrants who had entered the U.S. since 2000 and gotten a job was between 1.8 million and 1.9 million. This means that employment among the native born and established immigrants fell by at least 900,000, while new immigrants substantially increased their access to jobs in the U.S.

President Bush recently proposed the creation of a guest-worker program that would match foreign workers with available jobs from U.S. employers “when no Americans can be found to fill the jobs.” Although the goal of linking immigration policy with prevailing labor demand is an important and positive shift in what has been a chaotic national policy on immigration in recent decades, the employment numbers demonstrate that the president’s proposal cannot be defended on economic grounds.

The numbers suggest that native-born workers -- particularly teenagers and young adults without college degrees -- are being displaced by new immigrants. Indeed, last year the employment rate for teens reached a record low, down 9 percentage points since 2000. These are the very people who might benefit from the unskilled jobs now going to foreign workers. Over the last two decades, two-thirds of all the new jobs created in the U.S. have been ones that required at least some college. The earnings gap between college graduates and high school graduates has widened, as has the gap between high school graduates and dropouts. Large increases in unskilled immigrant workers have helped fuel real-wage declines at the bottom of the labor market and increased earnings inequality. Any policy that supports this trend cannot be justified.

The proposed guest-worker program will expand supply in an already oversupplied labor market, foster the further development of a substratum outside of existing laws and customs that regulate employment, and further diminish the chances of teens and other young adults, especially from low-income and minority communities, to get valuable work experience.

Immigration can play an important role in the long-term economic prosperity of the nation. But a guest-worker program that expands immigration in the middle of a jobless recovery is not the answer. Rather than rush into a faulty program to encourage foreign workers, we need to engage as a nation in a sustained and comprehensive national debate on how to best align immigration policy with our nation’s short- and long-terms skill requirements -- and with the goal of achieving greater economic justice for native-born workers.