Friday, June 3, 2011

On the BLS Birth-Death Index

I have received quite a few emails this morning bringing up the fact that the Bureau of Labor Statistics added  206,000 to the May jobs figure via the birth/death index. The birth-death index being BLS estimates of jobs created (lost) because of new firms that have started versus those that have died.

The thinking from the emailers is that this should be subtracted from the number of employed, as a bogus number. This is not exactly correct.

First, technically, the BLS has now made clear that they do not add (or subtract) the birth-death numbers directly on a seasonally-adjusted basis as part of their monthly seasonally-adjusted jobs report. Thus, the non-seasonal index shouldn't be added (or subtracted) directly. Here's the BLS:

Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?

A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.
You would have to thus do a few calculations before subtracting the birth/death from the seasonally-adjusted jobs number, since the BLS isn't going to do it for you. The BLS again:
Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change?

A: BLS does not calculate an estimate of the seasonally adjusted contribution of the birth/death model. The sample, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate total employment estimate. The components are not seasonally adjusted separately because they do not have any particular economic meaning in and of themselves.
(Note: A quick glance at the May seasonal and non-seasonal numbers shows that the seasonal adjustment was upward this month, which means that subtracting out the birth-death seasonal number this month would require a subtraction of more than 206,000)

But aside from this technical point, in the old days, the birth-death index was a highly suspicious number and I am far from certain that the BLS has an accurate picture of birth/death even now.

Effective with the release of preliminary January 2011 employment estimates in February 2011, BLS began updating the CES net birth/death model component of the estimation process more frequently, generating birth/death factors on a quarterly basis instead of annually. This is a start in getting more accurate data, but of additional significance, I believe that more people are going to work for themselves, i.e., starting their own business---coming out of this recession. So it may be incorrect that the 206,000 (seasonally adjusted) number should simply be subtracted from the jobs number.

Given government regulation and burdens from Obamacare on through, it is clear that many medium and small size business are outsourcing work that used to be done internally. This work being done by new free lancers should be counted as part of the workforce via birth-death.

Again, I doubt the BLS birth-death numbers are very precise, but coming out of the recession they are much more important than they ever were. Unfortunately, the only crosscheck to the birth-death index, is data the BLS puts out via its Business Employment Dynamics Summary. The problem with this is that the numbers aren't updated very frequently. The current data is only through September 2010, and the economy just started to improve at that point, so it is only the next quarter of data (end December 2010) that will be relevant with regard to whether the economy is starting to see an increase in employmentt from what would contain start-ups, the change in employment via small firms.

Even better than this data set, the BLS has started putting out data on the actual number of startups, in its Business Employment Dynamics-Entrepreneur section,  but that data is only updated through March 2010, so there is a real lag in current data there.

Bottom line: There is a lot of guessing and estimates in the BLS jobs numbers. They should be used as a rough guide only. It made sense to subtract out the birth/death data, when it seemed to have little basis in reality. Now that the possibility exists that more one man-type shops are opening up, it makes more sense to treat the birth-death data with a little more respect. And it will be very interesting to see if the BLS Business Employment Dynamics data support the current BLS birth/death estimates.

4 comments:

  1. I get the intent of the birth/death thingie, but it just does not 'smell' right. I have this gnawing feeling that it can easily be gamed for political points or demerits, depending upon the game controller.

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  2. the biggest problem with this kind of numbers is that they hide dynamic of *quality* of jobs.

    i.e. somebody losing $70/hr engineering job and having to pick a minimum-wage unskilled job to make the ends meet produces exactly zero impact on BLS stats.

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  3. averros, I agree. I used to own my own business, and I made an income in the upper realm of 6 figures. However, today I do not make as much, I am a contractor (cannot even file for unemployment), and I take whatever work I can get on the side as a 1099 contractor. Granted, I am not struggling to survive (my savings and commodity investments are my lifeline), and I can take work at much lower rates than I am accustomed to (and, I do); but, the B/D index does not account for these discrepancies, nor do the "official rates" of unemployment.

    I know of more than a few MBAs that are making $15 an hour, and I won't even begin to tell you about those in my own industry (film post-audio, publishing, electrical engineering) that are just scraping by. The only guys in my graduating class that are making any scratch is my buddy who owns a medical-billing firm (cha-ching), one that works as a pharmacist, another that works as a records storage manager for the largest medical hospitals in Cleveland, and yet another that is an electrical engineer that works on industrial power systems for the Navy. All of these guys (and, they aren't shy about it) are making their living off of the government.

    Wenzel, I don't know what your contracts are, or how you make your living. But, if you're in the private world, with no government money coming in, it is dire. I used to employ 20-30 people, now it is just me, and I am an independent contractor now (just me). The BLS numbers don't have any sort of thing to even figure guys like me into the numbers (we don't exist in any form but from a differential); they're just guessing. So, once you're ready to talk real economics, stop believing econometrics and their fancy numbers, and actually live in the private sector FULL-TIME, then I say you're just another babe sucking off of the teat.

    Here, I'll give you a challenge. I am well-read in economics, as well as statistics and calculus, and I have given my hand at this in the past and failed miserably. Since you are so confident of the government numbers (or, their public proclamations as such), please show me their methodology... Concisely...Show me how they come up with their numbers, and how the BLS B/D model plays into these numbers... I guarantee it will absolutely boggle your mind.

    Sure, you cannot just subtract it as I did in my email to you, but then again, you cannot discount the econometrics that play into the official figures of unemployment. The more that you dig into it, the more that you realize that none of the numbers have any connection to reality. Dig in....

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  4. In the past four months of around 760k jobs being added, B/D made up 650k of them.

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