Unemployment: Birth/Death Adjustments Overstated Jobs by 902,000

Leading up to the release of today's BLS Employment report, there was a lot of talk about the birth/death adjustment.  The b/d model can be a bit tricky to explain - I think Barry Ritholtz's old piece here does a good job of summarizing what happens.  Basically, the BLS estimates job creation or destruction based on the filings of new company incorporations - because companies which are too new or too small don't get counted in the CES (current employment statistics) survey. In Ritholtz's words:

"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."

Today, when the number came out, the results were even worse than most expected.  From the BLS report:

"The total nonfarm employment level for March 2009 was revised down-ward by 902,000 (930,000 on a seasonally adjusted basis), or 0.7 percent. The previously published level for December 2009 was revised downward 1,390,000 (1,363,000 on a seasonally adjusted basis)."

In plain English, all the employment data that was reported up thru March 2009 understated the number of jobs lost by 902k.    How big a variance is this?  Is it normal?  The CES tells us:

"The March 2009 total nonfarm payroll employment estimate was revised downward by 902,000 or -0.7 percent. Over the past decade, absolute benchmark revisions have averaged 0.3 percent, with a range from 0.1 percent to 0.7 percent.  Benchmark revisions are a standard part of the payroll survey estimation process. The benchmark adjustment represents a once-a-year re-anchoring, based on March data, of sample-based employment estimates to full population counts available through UI tax records filed by nearly all employers with State Employment Security agencies."

In other words, this revision was the largest (at -.7%) since the modern adjustments began 10 years ago.  The interactive Bloomberg graphic I linked to above also highlights this dispersion. 

-KD