DEFINITION of Birth-Death Ratio
The birth-death ratio represents the net number of jobs provided from newly started businesses (births) and business closings (deaths). Birth-death figures are put out by the Bureau of Labor Statistics (BLS) as part of the monthly employment report. Births and deaths are used to improve the estimates of the BLS's monthly Current Employment Statistics (CES) survey.
BREAKING DOWN Birth-Death Ratio
About 149,000 businesses and government agencies are sampled every month, covering about one-third of all nonfarm workers. New firms generate a portion of employment growth each month, but because they are new, they are not immediately eligible to be sampled by CES. According to the BLS, there is a lag between when a company opens for business and when it becomes eligible to be sampled. Certain methods, including the use of the employment changes due to births and deaths, are therefore used to estimate the net change in employment.
A major criticism of the birth-death ratio is that the reported net gain/loss in jobs often becomes inaccurate at turning points in a business cycle. If companies that were in the sample suddenly stop reporting their employment data, does that mean they went out of business or that they just failed to report on time? This is estimated statistically using historical data. But if the economy has just entered a severe recession, meaning that a higher than average number of companies will be going out of business, the historical data may provide an estimate that is not accurate. It may underestimate the number of companies going out of business and the number of jobs being created.