Uncle Sam's labour pain
The December 2009 unemployment rate for the US was stood at 10%. What, however, was shocking was the 85,000 jobs were lost, while the general expectation was there would be no job loss. The euphoric expectation was on the back of a mere 11,000 job loss reported in November’09. While the November number was revised upward to plus 4,000 (implying a creation of 15,000 jobs, which though is more of a statistical effect, since the October job loss was revised upward by 16,000) the December numbers poured water on whatever positive expectation that was there on the ground.
Clearly, whatever the spin doctors are saying, the US is far from being out of the woods. The mean duration of unemployment continued to rise and has crossed 29 weeks (29.1 weeks to be precise).
But there’s even worse news. As reported by the New York Times during end November’09, the BLS has admitted that its Birth/Death Model has overestimated jobs by about 800,000. The Labor Department said that it planned to revise the job figures by subtracting more than 800,000 jobs that it had wrongly estimated were filled by workers.
A lot of blame for this goes to the so called birth/death model. This means that it has been assumed that jobs have been created by newly born companies that couldn't be surveyed, and weren't contacted, by its workers. The acceptance by the labour department clearly means that they failed to estimate how many small businesses failed.
That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought. This is also intuitively valid, given that the current recession has hit small businesses especially hard, driving down demand and choking off vital sources of credit at the same time. The problem is, this is not only underestimating the grim unemployment situation, it is very likely that even the GDP is being over estimated by the inflated employment numbers.
According to the November 25th Press Release of the American Bankruptcy Institute, 45,510 business bankruptcies were recorded during the first three quarters of 2009 (Jan. 1 – Sept. 30) which is more than the full year 2008 (Jan. 1- Dec. 31) business filing total of 43,546. And this number is already the highest ever recorded since 1998. Business filings for the 3-month period ending Sept. 30, 2009, totaled 15,177, up 32 percent from the 11,504 bankruptcy business cases filed in the same period in 2008.
Problem is, it is very difficult for the Labor Department to incorporate all these data in its monthly employment reports, which are normally released on the first Friday of the next month. Hence, their report depends a lot on estimates. As per BLS survey methodology, the department surveys about 160,000 firms to get a sense of how many jobs were added or cut and it also uses the "birth-death" model to try to estimate out how many companies opened or closed. Once a year, the department looks at unemployment insurance tax records to get a more accurate picture of how many people were employed, and matches that up with its own data. And, each February, it tries to reconcile these differences by releasing a "benchmark revision".
The so-called “benchmark revision” that was announced in late November 2009 will not formally be incorporated into the job figures until February, and could be revised. But the figures indicate that last March the government overestimated the total number of jobs by 824,000. Reducing that number from the employment figure and adding the same to unemployment shows that the actual unemployment rate for March 2009 should have been 9.2% rather than 8.6%, implying an understatement of the unemployment rate by as much as 60 basis points.
So, once the revision is done in February, the actual unemployment rate will look very anemic indeed. Assuming the miscalculation of 824 remains the same, the current unemployment rate would be actually 10.5% and not 10% as reported. And it is quite likely that the same mistake is still taking place. This means that the real unemployment number would actually be even worse.
