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.