Use access key #2 to skip to page content.

The Mysterious Birth / Death Adjustment

Recs

32

June 08, 2009 – Comments (8) | RELATED TICKERS: B , D

 

I have been blogging for at least a year about the absurd phantom jobs the Bureau of Labor statistics' "Birth / Death" adjustment has been adding to the real jobs numbers.  The fact that the B / D adjustment has been slowly growing over the past several months has lead many to cry that the BLS is manipulating the employment data to make it look better than it really is.  I would argue that the BLS is incompetent, but not intentionally misleading anyone.  Rather than using an absurd adjustment that everyone who is paying attention knows is wrong, they should just publish the straight data and let everyone plug it in their own models or form their own opinion on it.

The Big Picture had a great explanation about why the B / D adjustment has been getting even larger and more misleading as the recession goes on (besides I needed an excuse to post the above graph...I nearly laughed out loud when I saw the WTF):

A quick refresher on the Birth Death adjustment: In 2001, the Bush administration directed the BLS to compensate for the tendency of the Establishment Survey to miss new business formation and the impact on employment. Previously, BLS tended to under report new jobs in the beginning of a a cycle turn. What the new B/D Adjustment series did was take new incorporation filings per state, and deduce from them that new jobs were being created. (That took effect around 2003).

This improved somewhat the ability to capture new jobs at the start of the cycle. But the flaw in the adjustment was that the model radically overstated job creation at the end of the cycle. Say a firm goes out of business, or lays off 100s of workers. They form new shops, incorporating these start ups.  According to the BLS, that is job creation.

But in reality, a steady paycheck with benefits has now been transformed into a start up with none of the above. And as we know, 90% of all new businesses eventually fail.

How misleading is the BD adjustment at the end of the cycle? Consider that in 2007, 75% of the BLS newly created jobs were due to the B/D adjustment. That did a nice job masking the actual problems beneath the surface.

The comment about recently laid off individuals starting their own companies, meshes with the observation that I made about all of the new financial services' companies that have popped up in my office building over the past several months (see post: Investment advisors are swarming like bees).

Yes, we all know that the employment situation is much worse than the BLS numbers make it look.  Having said this, the rate of the decline in the deterioration of the labor market has slowed significantly lately.  The massive layoffs that we saw during the panic at the end of 2008 are out of companies' systems.  The jobs situation is bad...the most widely reported unemployment rate will almost certainly exceed 10% before the end of the year...but the end-of-the-world freefall in the economy appears to have been stopped.

Interesting stuff. 

Deej

8 Comments – Post Your Own

#1) On June 08, 2009 at 5:31 PM, JGus (28.90) wrote:

Deej,

It's laughable to me that the BLS can add 77,000 jobs last month in the Leasure & Hospitality supersector through the B/D adjustment when you take this fact into account:

In year-over-year measurements, the hotel industry’s occupancy fell 11.1 percent to end the week at 59.4 percent.

Also, even though companies may not be laying off people at the same rate as the late fall-winter period, more and more are cutting hours and/or wages to the employees that they are keeping on board. This can have just as large an impact as laying someone off.

Report this comment
#2) On June 08, 2009 at 8:03 PM, Donnernv (< 20) wrote:

JGus:

I agree, in the main. with your observations.  But, I have to disagree with the statement that cutting hours/wages can have just as large an impact as laying someone off.

The President and I decided upon a 20% hours reduction at my own company.  We did this so no one would lose his job and so that health insurance was maintained.  Moreover, for those who chose the four day option, commuting gas could be saved.

When this was announced, recognizing the dropoff in our revenues, the employees said "thank you"..  They had been petrified before the announcement.

As our volume recovers, we'll go to a 10% reduction in hours and then back to the normal 40 hours.  I don't think a single employee would have chosen to see some of their compatriots (or themselves) lose their jobs.

Report this comment
#3) On June 08, 2009 at 10:49 PM, ChrisGraley (30.14) wrote:

The real unemployment rate is about 20% right now.

Report this comment
#4) On June 09, 2009 at 12:11 AM, JGus (28.90) wrote:

Donnernv

Like I said, it CAN have just as large an impact as laying someone off. Here are a couple ways that is possible:

-Company XYZ employs 10,000 people. Instead of laying off a percentage of them, they decide to reduce everyone's work week by 5 hours. That's a total of 50,000 paid hours/week. Or, put another way, a total of 1,250 full-time employees. The unemployment numbers won't go up as a result, but the impact is still significant. As you mentioned, the most important difference is that these employees still get their benefits. But, what happens if:

-Employee 123 of XYZ is living check-to-check (as tens of millions of Americans are). Before he/she even receives their paycheck, every dime of it is spent. The 12.5% reduction in hours/pay puts them in a position where they have to begin making decisions about which bills to pay and which ones to become delinquent on. Within 6-12 months they are in serious trouble. They may lose their home, have their car repossessed, have to file for bankruptcy, etc. For people in this position, a 10-20% pay cut leads to the exact same destination as an outright layoff...it just takes a little longer to get there.

-Also, as thousands of companies go this route, it will compound the unemployment problem. Why? Because all of these companies will simply add hours back to their existing employees before they begin making new hires. Thus, those without jobs will have to wait that much longer before companies begin hiring again.

Report this comment
#5) On June 09, 2009 at 6:04 AM, TMFDeej (99.46) wrote:

I agree, JGus, that the jobs situation is terrible right now and that the BLS does an awful job of reporting accurate data.  Having said that, its data has been misleading all along and it is getting "less bad."  You have to walk before you can crawl.

Needless to say, the jobs market and the economy are really messed up and they will likely remain so for a while.  I'm just looking for a sign that the rate of deterioration is getting slower...and it is.

Deej

Report this comment
#6) On June 09, 2009 at 6:08 AM, portefeuille (99.63) wrote:

Hi tmfdeej,

great post (really. interesting).

 

 

(since you appear to be awake, could you have a look at this and tell me whether this "proprietary formula" for the "star ranking" system has been described somewhere? thank you.)

Report this comment
#7) On June 09, 2009 at 11:22 AM, ceejayoh (71.58) wrote:

One thing that isn't  being taken into account is that many of those losing jobs are 50 and older.  Re-training and re-employmnet is much harder at this age.  They also have more health problems and the loss of insurance benefits is a major blow. Many of these workers are forced into early retirement and not included in  the unemployment figures.  Some of those in this position may try starting their own businesses using retirement savings. If the business fails, they have lost what retirement income they had.  I know two close friends in this position. There is a crisis coming concerning the elderly in this country. The elderly will be forced to be in the labor market when they had planned to retire.

Report this comment
#8) On June 09, 2009 at 3:11 PM, bostoncelitcs (59.67) wrote:

I say the unemployment rate is actually......"lower" than the BofL&S numbers suggest.  The actual professional jobs requiring high-skilled workers with college educations are the ones that have been lost,  but these jobs have more than been made up with low-paying non skilled ones such as fast-food restaurants and landscaping services.   Resulting in a net decline in our standard-of-living.  Thus the feeling like we are in a depression.

Report this comment

Featured Broker Partners


Advertisement