January 14, 2005
The Labor Department recently announced that US employers
created 2.2 million non-farm jobs last year, on a seasonally adjusted
basis. With that kind of job creation, perhaps corporate America
will secure the financial future of the country, and the world at
large. After all, if 2.2 million jobs were created then 2.2 million
consumers were empowered.
But, how accurate are labor figures?
The Department of Labor doesn’t go out every
month and count all those who have jobs. Employment estimates are
based on a sample of US corporations, and the data is then statistically
treated to give an approximation of the overall labor environment.
During the 1990s, the Labor Department felt that employment
estimates did not account for the number of jobs created when new
companies were formed. As you may recall, thousands of new companies
were being formed during that “New Era” of the tech-boom.
So a method was devised to account for those jobs.
In June 2000, the CES (Division of Current Employment
Statistics of the US Department of Labor) began implementing a new
adjustment to the employment data based on a corporate net birth/death
It works something like this: based on the number of business closures,
the Bureau of Labor Statistics (BLS) estimates how many businesses
are created. And based on how many businesses they think were created,
they add a number of jobs. The only measured sample here is how
many businesses closed down; all the rest is guesswork.
The BLS website admits that “…The most
significant potential drawback to this, or any model-based approach,
is that time series modeling assumes a predictable continuation
of historical patterns and relationships, and therefore is likely
to have some difficulty producing reliable estimates at economic
turning points, or during periods when there are sudden changes
During the Nineties, when an inordinate amount of
new businesses were incorporated, the number of new businesses created
relative to business failures was large. Now, I suspect, the opposite
might be true. So the first question, is how accurate is the estimation
of new businesses created in 2004, based on businesses that closed
down? In other words, is it reasonable to assume we are dealing
with a predictable continuation of historical patterns and relationships
in the birth/death ratio of corporations in the current economic
The second question, clearly, is how accurate is the
estimation of employees per business created? For example, I work
for myself, and as part of my own business planning I incorporated
three companies last year. However, I did not hire even a single
employee. So how relevant are new business registrations to the
overall employment figures?
According to the BLS, the net amount of jobs added
by the birth/death calculations is “relatively small”.
So why worry about it?
The birth/death factors are not seasonally adjusted,
and so cannot be subtracted out from the seasonally adjusted labor
numbers; they can only be compared to non-seasonally adjusted numbers.
The US economy supposedly added 2.2 million non-farm
jobs last year. The non-seasonally adjusted numbers, including farming,
however, show that only 1.722 million jobs were created. Now, the
interesting thing is that in a separate press release, the BLS announced
that the imputed number of jobs created from its birth/death model
for 2004 was 836,000, or 48% of the total number of jobs created
during the whole year. In my books 48% is most certainly not a “relatively
Now, I don’t know if the employment numbers
are right or wrong. But I do know that if roughly fifty percent
of the jobs created last year were created on a spreadsheet, based
on how many businesses were incorporated, and how many jobs those
new business created, based on how many businesses failed, then
I have my suspicions.
The point is that if the US economy is not creating
the jobs that we are led to believe it is creating, who is going
to buy all the stuff that American corporations are producing? America
most certainly cannot rely on foreign consumption; it has a trade
Perhaps here are more accurate indications of the
labor situation: the US labor force participation rate is declining,
especially among younger workers. The labor force participation
rate is the percentage of the "working age" population
that is willing and able to work, and is either employed or actively
seeking employment. The trend data show that while younger people
are, apparently, less eager to join the work force, the number of
people fifty-five years and older, working, or looking for work,
is increasing. That doesn’t sound healthy to me.
Could it be that a lack of employment opportunities
is keeping younger people out of the labor market while the older
work force is forced to work because they cannot afford retirement?
Are those the kind of demographics that would suggest we are just
about ready for another period of sustained economic growth in the
Paul van Eeden
Paul van Eeden works primarily to find investments for his
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