Sunday, October 04, 2009

Shortcomings Of The "Birth/Death" Model Finally Recogniced?

While I didn't mention the "birth/death" model used by the U.S. Bureau of Labor Statistics in my latest post about U.S. employment reports, I have mentioned it in quite a few posts in the past (for example this one). And I have always been critical to it since that model appears to assume (The BLS refuses to tell the rest of us how the model is calculated) that not only will new businesses started ("births") increase during recessions, but that this increase will be big enough to cancel out the increase in business failures/liquidations ("deaths"). Or in other words, they assume that the difference between new businesses and failed businesses will not decline when the economy goes from a boom to a bust, a very unreasonable assumption.

While that is not inconceivable, it is highly unlikely, creating an obvious "bullish" bias in recessions (on the other hand, it also probably creates a "bearish bias" during booms, but that is not relevant for analysis of the current economic situation).

The fact that the latest annual revision showed a record big downward revision illustrates the "bullish bias" created by the "birth/death" model.

It also means that the more recent numbers probably underestimated job losses. While I and other have long argued for this view, this Bloomberg story could mean that many in the financial press is finally understanding it too.


Blogger Kapitalist said...

People who get fired might start new one-man businesses as an alternative to looking for a new employment. Of course, that new business is a worse alternative for them than it would have been to keep their old job. But for some it is the best alternative to make a living.

So I could understand how "births" could increase along with unemployment rates.

Actually, I've myself witnessed how big companies (in one particular industry, anectodically) tends to fire many salesmen in downturns. These often start new companies and "steal" the clients they once won for their ex-employer as a starting ground. In strong upturns, the old established companies seemingly expensively buys back "their" clients by buying the firms founded by their ex-employees.

Maybe such behavior could be explained by information asymmetry, but that was not the issue here.

7:07 PM  

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