Department Of Labor = Department Of Liars?

The US Department of Labor provides weekly numbers on unemployment claims. It looks at the number of people that have submitted new claims as well as the number of “continuing” claims. The continuing claims are those that are still receiving unemployment assistance. I recently read a great article on The Market Oracle which took a deeper look at the economy - and specifically noted the issues involved in calculating the monthly non-farm job losses. The writer specifically identified a major FRAUD in the numbers. The fraud was the “Birth Death Model”.

Essentially the Birth Death Model is an adjustment to reality. The adjustment is based on the DOL’s belief that new business formations and/or deaths are not clearly picked up in the data and therefore an adjustment needs to be made in the reporting. The DOL has decided that it’s best to modify reality or to try to “model reality” instead of just reporting reality. I have a problem with this.

Here’s how the DOL describes the birth/death model and why they do it :

• There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.

• Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.
• The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to the not seasonally adjusted monthly employment estimates to derive the final CES employment estimates.

Essentially the DOL models the data based on the Birth Death Model. What I also found interesting was the fact that they use historical information derived from the prior five years to arrive at the adjustment for the model. Hasn’t Nassim Taleb, Black Swan author, taught us enough already about not relying on historical information to predict the future. Apparently the DOL has not read his book yet.

The next logical question is how big of an adjustment is this phony birth death model having on reality. To understand this, you need to look at the monthly changes in 2009 and then adjust the data that was already reported. Conveniently (hat tip) the DOL does provide the adjustment in the monthly data; unfortunately it’s not in the weekly reports that are released. You have to dig or be lucky enough to find it in the vast DOL website.

Here’s the 2009 Adjustments.

You can see that in the month of April there was an adjustment of 226,000 workers that were added to the reported numbers. The April Release of the Non Farm Payrolls was -539,000. The actual numbers were: -539,000 - 226,000= -765,000. You can see how the Birth Death model is impacting the numbers.

The true non farm job loss over the last three months, adding back the adjustments for the Birth/Death model would have been :

Feb. - 813,000
Mar. -815,000
Apr. -765 ,000

The losses are seemingly worse that what was reported.

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