Birth-Death Ratio

What Is the Birth-Death Ratio?

The birth-death ratio is an estimate of the net number of jobs in a given period that have been created by new businesses, or births, and lost to business closings, or deaths.

Birth-death figures are published by the U.S. Bureau of Labor Statistics (BLS) and contribute to the data contained in its monthly Current Employment Statistics (CES) survey.

Understanding the Birth-Death Ratio

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

The BLS recognized that its sample-based estimates were failing 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. Moreover, it's not easy to track the action as new companies pop up and old ones shut down.

Survey Methodology

Given this conundrum, the bureau opted to make certain adjustments, employing a statistical model to estimate the numbers of jobs lost and jobs created.

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.

Economic turning points are difficult to capture accurately. The birth-death ratio may underestimate job losses due to business closings.

Criticism of the Birth-Death Ratio

The BLS' model-based approach has attracted a great deal of scrutiny. One criticism of the birth-death ratio is that the reported net gain/loss in jobs can become inaccurate at turning points in a business cycle. If companies that were in the sample suddenly stop reporting their employment data, did they go out of business or just fail to report? There's no way to tell.

The number is estimated using historical data. However, if the economy has just entered a severe recession, a number of companies higher than normal will be going out of business. The historical data are then yielding an inaccurate estimate. It may underestimate the number of companies going out of business and overestimate the number of jobs being created.

Economic Turning Points

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 as the economic recovery begins.

On its website, the BLS admits its technique is not without flaws. The BLS notes that its technique assumes a predictable continuation of historical patterns and relationships. That makes it difficult to produce a reliable estimate at economic turning points.