Unemployment – Model Is Broken

Unemployment statistics are flawed.

What have I been saying ever sine the recession began, the Bureau of Labor Statistics use of the "birth/death" model is flawed. To adjust the monthly jobs data by a number which is computed from a ‘model' of how many businesses were created and how many closed up during any given month is simply asking for trouble in maintaining any sense of accuracy.

The main purpose of the birth/death model is an attempt to offset the jobs data by what the BLS believes to be happening in the real world, the only problem is that the model relies on assumptions. And assumptions are worthless in an economic collapse.

When the Government releases Friday's employment report, nearly a million jobs could be erased. The change won't show up in the monthly report. Rather, the expected drop will show up in the government's revised job losses from April 2008 to March 2009, showing the labor market was in much worse shape than we knew at the time.(…)

Blame the birth/death model for the revision. Built on years of research, the model's key assumption is fairly simple: most of the time jobs created at new companies make up for losses at companies that close. In October, Keith Hall, Commissioner of the Bureau of Labor Statistics, said most of the coming revision "appears to be due in part to an increase in the number of business closings," short-circuiting the model's assumption that deaths are offset by births.(…)

The Labor Department says there are flaws in its models and its monthly employment survey but it defends the process, saying the annual employment revisions are small and stable. (…) (Source: Bloomberg)

Small and stable? I don't think a calculation error of 800,000 to 1 million additional job losses is ‘small and stable'.

The birth/death model should be shelved, permanently.