What Is the Birth-Death Ratio?

The birth-death ratio seeks to calculate the net number of jobs generated from newly started businesses (births) and business closings (deaths). Birth-death figures are published by the Bureau of Labor Statistics (BLS) and are used to improve the estimates of its monthly Current Employment Statistics (CES) survey.

Key Takeaways

  • The birth-death ratio seeks to calculate the net number of jobs generated from newly started businesses (births) and business closings (deaths).
  • The figures are published by the Bureau of Labor Statistics (BLS) and are used to improve the estimates of its monthly Current Employment Statistics (CES) survey.
  • The birth-death ratio was created because the CES sample fails to fully capture the significant chunk of employment growth generated from new firms.

Understanding the Birth-Death Ratio

Approximately 142,000 businesses and government agencies are sampled for the CES survey every month, representing about one-third of all nonfarm payroll employees.

The problem is that new firms, a key source of employment growth, tend to fall off the radar. The BLS recognizes that its sample-based estimates fail to fully capture the entrepreneurial environment because there is a time lag between when a company opens for business and when it becomes available for sampling.

Given this conundrum, the bureau opted to make certain adjustments, employing a statistical model to estimate jobs lost or created by bankruptcies or new business formations.

Former President Ronald Reagan reportedly pushed the BLS to introduce the birth-death ratio adjustment after complaining that its employment data was overlooking the number of new jobs his administration had helped to create.

The BLS' methodology is made up of two components. First, job losses caused by business deaths are excluded from samples to offset missing employment gains from business births.

The bureau then completes the process and fills in any blanks. The bureau draws on birth and death real business data over the past five years using an auto-regressive integrated moving average (ARIMA) time series model. In 2011, the BLS began applying the birth-death ratio to its CES survey more frequently, forecasting on a quarterly basis instead of annually.

Criticisms of the Birth-Death Ratio

The BLS' model-based approach has attracted plenty of scrutiny. 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. However, if the economy has just entered a severe recession, a higher than average number of companies will be going out of business, the historical data may provide an inaccurate estimate. It may underestimate the number of companies going out of business and the number of jobs being created.

These concerns are reflected in its patchy track record. The birth-death ratio generally has a reputation for overestimating new business job creation when the economy is slowing and underestimating it at the beginning of a recovery.

On its website, the BLS admits its technique is not without flaws. BLS notes that it "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 in trend."