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Circle of Life: What Is the Birth-Death Adjustment?

Macro Minute
August 15, 2023

July's nonfarm payrolls report showed that employers added 187,000 jobs in July, compared to 185,000 in June. These figures are obtained from the responses of about 122,000 businesses to the Bureau of Labor Statistics' (BLS) monthly Current Employment Statistics (CES) survey. This sample represents about one-third of all nonfarm payroll jobs in the United States and tracks respondents' payroll levels for one year. But in our dynamic economy, new businesses are opened, and older businesses shut down continually over time. How does the BLS account for this churn when reporting jobs growth?

Respondents to the CES survey come from a sample of existing businesses, so the sample ultimately shrinks because some businesses close and newly formed businesses are not surveyed. The net business birth-death adjustment accounts for this nonsampling error in the monthly payroll figures using a statistical model based on the history of business births and deaths observed in the Quarterly Census of Employment and Wages (QCEW).

The QCEW provides a more complete picture of payroll employment because it is derived from unemployment insurance tax records that nearly all employers are required to file. However, the data are released with a significant lag and made public more than five months after the end of a quarter. Birth-death adjustments are partly based on forecasts made using the previous five years of available QCEW data. For instance, the birth-death adjustment for July was based on a model that used the latest QCEW data through the third quarter of 2022. According to the BLS, "While both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable."

Figure 1 below plots the birth-death adjustment since 2007.

Figure 1: Net Business Birth-Death Adjustment

Chart plotting the birth-death adjustment since 2007.

Source: Bureau of Labor Statistics via Haver Analytics

Has the birth-death adjustment during the pandemic differed versus pre-pandemic years? Figure 2 below shows that the 12-month moving average birth-death adjustment fell sharply during the trough of the pandemic recession in spring of 2020. It then rebounded and has since been elevated compared to pre-pandemic levels. This recent rise corresponds with a rise in business formation observed during the pandemic. As shown in Figure 2, year-over-year growth in the number of establishments measured in the QCEW is currently about 3 percentage points higher than its pre-pandemic benchmark.

Figure 2: Birth-Death Adjustment Versus Growth in Number of Establishments

Chart showing birth-death adjustment versus growth in number of establishments between January 2004 and April 2023.

Source: Bureau of Labor Statistics via Haver Analytics

The elevated level of the birth-death adjustment also tracks with another indicator of business formation collected by the Census Bureau: the Business Formation Statistics database, which tracks applications for Employer Identification Numbers (EINs). These applications are a leading indicator of business formations of new employers, because businesses that hire employees need to first obtain an EIN for payroll tax purposes. The business applications series is published monthly and is timelier than the QCEW count of establishments: The latest data are available through June 2023. As shown in Figure 3 below, the 12-month moving average of the net business birth-death adjustment has increased alongside the rise in the corresponding measure of business applications.

Figure 3: Birth-Death Adjustments Versus Business Applications (12-Month Moving Averages)

Chart of birth-death adjustments versus business applications between January 2007 and May 2023.

Source: Bureau of Labor Statistics and Census Bureau via Haver Analytics

Prior research by the BLS has demonstrated that the birth-death adjustment improves the accuracy of CES payroll employment estimates (PDF). With business formation indicators pointing to ongoing dynamism among U.S. entrepreneurs, the net business birth-death adjustment process has been particularly important to ensure that monthly payroll figures accurately reflect the resilience of the U.S. labor market.

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Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.