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BLS B.S.: 93% Of New Jobs Since 2008 Were Birth/Death Model Estimates

by Dave Kranzler, Investment Research Dynamics:

A research report from Morningside Hill Capital sourced from Zerohedge shows that 93% of the jobs “created” since 2008 were Birth/Death model estimates. While some portion of those jobs were no doubt legitimately created, the issue is over-estimation of jobs created by new businesses net of jobs lost from failed businesses. As it turns out, most of the job growth that has been reported by the Government since 2008 – and which in turn fueled some massive stock rallies – never existed.

Ronald Reagan’s administration was the “culprit” behind the creation of the Birth/Death model because apparently Reagan was complaining that the BLS was undercounting the jobs he “created” (from the link above, pg 11).

The source of estimation error derived from the methodology used by the Census Bureau is highly flawed because it extrapolates B/D growth estimates based on historical experience. When the economic activity in the current period is below the historical rate of economic activity (real economic activity, not inflation-generated growth or growth fashioned from data manipulation), the slow-down in new business formation that occurs in reality is not picked up by the B/D model.

BLS Admits High Error Potential – If you bother to sift through the section of the BLS website that describes the Birth/Death model methodology – something which Wall Street analysts and financial news reporters have never bothered to do – the BLS admits the high potential for error. From the BLS website:

The primary limitation stems from the fact that the model is, of necessity, based on historical data. If there is a substantial departure from historical patterns of employment changes in net business births and deaths, as occurred from 2008 into 2009 during the 2009 benchmark, the model’s contribution to error reduction can erode. As with any model that is based on historical data, turning points that do not resemble historical patterns are difficult to incorporate in real time. Because there is no current monthly information available on business births, and because only incomplete sample data is available on business deaths, estimation of this component will always be potentially more problematic than estimation of change from continuing businesses.

Perhaps the biggest source of error comes from the Census Bureau’s estimate of jobs from workers not covered by UI tax reports (employers required to pay out unemployment insurance). These are part-time workers (primarily independent contractors). As the BLS admits:

There are some types of employees that are exempt from UI tax law, but are still within scope for the CES estimates. Examples of the types of employees that are exempt are students paid by their school as part of a work study program; interns of hospitals paid by the hospital for which they work; employees paid by State and local government and elected officials; independent or contract insurance agents; employees of non-profits and religious organizations (this is the largest group of employees not covered); and railroad employees covered under a different system of UI administered by the Railroad Retirement Board (RRB). This employment needs to be accounted for in order to set the benchmark level for CES employment.

Over time some sources from which CES draws input data have become unreliable.

Thus, even the BLS admits that the B/D model is B.S. Furthermore, in all probability, the “Death” component of the B/D model likely has outweighed the “Birth” component of the B/D guesstimates, as new business formation is at a 40-yr low based on two studies, one from the Census Bureau and one from Gallup. Per Gallup, the rate of firms closing began to exceed the number of new businesses in 2008. Thus, by the BLS’ and Census Bureau’s own admission, the B/D model has grossly over-stated the number of net jobs created since 2008. In fact, in all probability, the number of jobs from business “births” and “deaths” has declined.

Read More @ InvestmentResearchDynamics.com

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