Interactive: What Should be the Death of the Birth/Death Model

Of all the activities the US government undertakes, it’s the misleading ones that seem to occur most consistently. Revisions are always a good example, and one of the ugliest this week, well… at least tomorrow, will be the Friday jobs report. It’s expected to show a staggering 824,000 additional job losses between April and March of 2008, the largest such revision in nearly two decades.

How is this possible? Well, the error comes by way of a statistical shortcut the Bureau of Labor Statistics relies upon called the “birth/death model.” It takes for granted that the number of jobs lost at companies shutting down is roughly equal to the number of jobs being added at brand-new startups. How this assumption could possibly hold true in a steep economic downturn is anyone’s guess.

Via Bloomberg Multimedia, here’s a perfectly unreasonable-looking extrapolation:

The discrepancy shown above is only for a time period ending the first half of 2009. Despite the model’s shortcomings, nothing about it seems to have been tweaked between then and now. So, we shouldn’t be surprised if another 990,000 jobs are in the cards to vanish from the second half of 2009. See Bloomberg’s fun-to-use, detailed, and interactive content in its explanation of how, thanks to this model, 824,000 jobs are disappearing tomorrow… and perhaps more in the future.

The Daily Reckoning