Changes to the Net Birth-Death Model Due to the COVID-19 Pandemic

The widespread disruption to labor markets due to the COVID-19 pandemic and the potential impact to the birth-death model have prompted BLS to both revisit research conducted in the aftermath of the Great Recession (2008-2009) and incorporate new ideas to account for changes in the number of business openings and closings. Two areas of research have been implemented to improve the accuracy of our birth-death model in the CES estimates. These adjustments will better reflect the net effect of the contribution of business births and deaths to the estimates. These two methodological changes are the following:

  • A portion of both reported zeros and returns from zero in the current month from the sample were used in estimation to better account for the fact that business births and deaths will not offset.
  • Current sample growth rates were included in the net birth-death forecasting model to better account for the changing relationships between business openings and closings.

Firstly, BLS included a proportion of reports that fell to zero employment and reports that returned from zero employment in the current month in the over-the-month change of the sample-based estimates. Typically, reports with zero employment in either the previous or current month are not included in estimation. To account for an excess amount of reports going to zero employment as well as reports returning from zero employment, CES calculated the probabilities that either a reported zero or a return from zero exceeded what would be expected for the month. These "excess zeroes" and "excess returns from zero" partially account for drops in employment (when more business deaths than are usually observed in historical population data occur) and for increases in employment (when there are more business births than normal). More specifically, "excess zeroes" were used in our March final and subsequent months' first preliminary, second preliminary, and final estimates. "Excess returns from zero" were used in our March final; April second preliminary and final; and subsequent months' first preliminary, second preliminary, and final estimates.

Secondly, BLS adjusted the portion of business births and deaths that cannot be accounted for using our sample data by including more recent information. Net birth-death forecasts are normally modeled using an auto-regressive integrated moving average (ARIMA) based on 5 years of historical birth-death residual values that end 9 months before the forecast of the current month. Instead of using only historical data—data that would not accurately account for how the labor market has changed due to COVID-19—a regression variable that includes data up to the current month was included in the model. The regression variable is the CES sample-based ratio of over-the-month change, known as the sample link, for each of the major industry sectors. Each major industry sector sample link was used for the basic-level industries only within that sector. Using additional regression variables in the net birth-death forecasts accounted for 295,000 in employment for June at the total private level (see supplementary table 1).

BLS will determine on a monthly basis if the adjusted birth-death model described here continues to be necessary. We will disclose these changes each month in the Employment Situation news release. All months in the tables of net birth-death forecasts on this page include footnotes for any month in which a regressor was used to supplement the forecasts.

The original birth-death model is described in detail in the CES Technical Notes at www.bls.gov/web/empsit/cestn.htm#section6c. Additional information is available in a research paper called Impact of business births and deaths in the payroll survey by Kirk Mueller at www.bls.gov/opub/mlr/2006/05/art4full.pdf. A paper detailing previous research into using a regressor as part of the net birth-death model called Back to the Future: Using Current Regression Variables to Forecast Forward from Historical Net Birth-Death Employment by Victoria Battista is available at www.bls.gov/osmr/research-papers/2013/st130140.htm.

Supplemental Table 1. June 2020 Net Birth-Death Forecasts, not seasonally adjusted (in thousands)
CES Industry Code Major Industry Sector June Forecast Difference
With Adjustment No Adjustment

05-000000

Total private 295 73 222

10-000000

Mining and logging 1 1 0

20-000000

Construction 30 23 7

30-000000

Manufacturing 19 4 15

40-000000

Trade, transportation, and utilities 30 7 23

41-420000

Wholesale trade -4 -2 -2

42-000000

Retail trade 24 5 19

43-000000

Transportation and warehousing 10 4 6

44-220000

Utilities 0 0 0

50-000000

Information -1 0 -1

55-000000

Financial activities -1 0 -1

60-000000

Professional and business services 9 -20 29

65-000000

Education and health services -18 -24 6

70-000000

Leisure and hospitality 220 78 142

80-000000

Other services 6 4 2

CES Net Birth-Death Model

Currently, the CES sample includes about 145,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 697,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.

There is an unavoidable lag between an establishment opening for business and its appearance on the sample frame making it available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.

Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth-death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses due to business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the birth and death employment.

The second component is an auto-regressive integrated moving average (ARIMA) time series model designed to estimate the residual birth-death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual of births and deaths over the past 5 years. This ARIMA model was originally applied once a year using new data to calculate the net birth-death forecasts. Effective with the release of preliminary January 2011 employment estimates in February 2011, BLS began updating the Current Employment Statistics (CES) net birth-death model component of the estimation process more frequently, generating birth-death forecasts on a quarterly basis instead of annually. For more information about the quarterly birth-death forecasts, please see www.bls.gov/ces/methods/ces-quarterly-birthdeath.htm. For a comparison of annual birth-death forecasts to quarterly birth-death forecasts for all years from 2004 to the 2014 benchmark, please see www.bls.gov/ces/methods/quarterly-birth-death-comparison.htm.

The net birth-death model components are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations. Note that the net birth-death forecasts are not seasonally adjusted, and are applied to the not seasonally adjusted monthly employment estimates to derive the final CES employment estimates.

The table below shows the net birth-death model adjustment used in the published CES estimates since the establishment of the most recent benchmark level for March 2019.

2019 Net Birth-Death Forecasts, not seasonally adjusted (in thousands)
CES Industry Code Supersector Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10-000000

Mining and logging

-1 1 1 1 1 0 1 0 0

20-000000

Construction

33 40 25 9 10 4 23 -11 -13

30-000000

Manufacturing

1 7 4 -2 3 2 5 3 1

40-000000

Trade, transportation, and utilities

9 22 8 10 14 7 38 7 4

41-420000

Wholesale trade

-2 3 -2 -1 2 -2 8 2 0

42-000000

Retail trade

8 13 6 8 7 4 20 -4 -1

43-000000

Transportation and warehousing

3 6 4 3 5 5 10 9 5

44-220000

Utilities

0 0 0 0 0 0 0 0 0

50-000000

Information

3 5 1 5 2 0 9 4 -1

55-000000

Financial activities

3 6 2 8 3 -7 28 2 7

60-000000

Professional and business services

94 19 -5 49 21 -24 104 2 -28

65-000000

Education and health services

43 15 -19 32 17 -4 67 10 -12

70-000000

Leisure and hospitality

83 86 86 75 20 -50 17 -31 -6

80-000000

Other services

14 8 6 -1 4 -3 12 -2 -4

00-000000

Total nonfarm
net birth-death forecast

282 209 109 186 95 -75 304 -16 -52

2019 Total nonfarm over-the-month change, not seasonally adjusted (in thousands)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Total nonfarm over-the-month change

1,071 679 630 -1,040 442 415 1,014 607 -248

2020 Net Birth-Death Forecasts, not seasonally adjusted (in thousands)
CES Industry Code Supersector Jan Feb Mar Apr(1) May(1) Jun(1) Jul Aug Sep Oct Nov Dec

10-000000

Mining and logging

-1 0 0 -1 1 1

20-000000

Construction

-47 14 19 -29 66 30

30-000000

Manufacturing

-12 6 3 -33 13 19

40-000000

Trade, transportation, and utilities

-26 14 8 -80 27 30

41-420000

Wholesale trade

-15 5 -1 -14 3 -4

42-000000

Retail trade

-7 7 6 -38 20 24

43-000000

Transportation and warehousing

-4 2 3 -28 4 10

44-220000

Utilities

0 0 0 0 0 0

50-000000

Information

-9 5 -1 3 4 -1

55-000000

Financial activities

-25 8 -2 -11 11 -1

60-000000

Professional and business services

-40 32 -20 -133 30 9

65-000000

Education and health services

17 17 -15 7 21 -18

70-000000

Leisure and hospitality

2 40 32 -281 162 220

80-000000

Other services

-4 7 2 5 10 6

00-000000

Total nonfarm
net birth-death forecast

-145 143 26 -553 345 295

2020 Total nonfarm over-the-month change, not seasonally adjusted (in thousands)
Jan Feb Mar Apr(1) May(1) Jun(1) Jul Aug Sep Oct Nov Dec

Total nonfarm over-the-month change

-2,776 923 -1,003 -19,756 3,093 (p) 5,103 (p)

Footnotes
(p) Preliminary
(1) Net birth-death forecasts for this month use major industry sector sample link regressors in addition to the historical net birth-death input data in the RegARIMA forecasts. These are included to account for rapid changes in employment due to the COVID-19 pandemic.

Additional information on the CES birth-death model is available in the CES Technical Notes under Business birth and death estimation (www.bls.gov/web/empsit/cestn.htm#section6c) as well as on the birth-death frequently asked questions page at www.bls.gov/web/empsit/cesbdqa.htm.

Historical birth-death forecasts are available at www.bls.gov/web/empsit/cesbdhst.htm.

An overview of the CES birth-death model, including a detailed description of the original methodology is available at www.bls.gov/opub/mlr/2006/05/art4full.pdf.

 

Last Modified Date: July 2, 2020