The Mysterious Birth / Death Adjustment
June 08, 2009
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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
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