Friday, November 7, 2008

A Quick Note On Employment

The headlines have covered the big picture. We lost another 240,000 jobs last month, and September's figure was revised lower by 125,000. These are terrible numbers but not surprising given the sharp fall in economic activity in recent weeks. Plenty of companies have been announcing layoffs (right-sizing), and the management commentary on the conference calls that I've heard makes it clear that more cuts are coming.

One of my favorite components of the employment report is the birth/death model. A review of this model is available here. Remember that this model is responsible for about 1/3 of the total nonfarm payroll figure. For September, the birth/death model continued to spit out some absurd figures. Despite a fall of 240,000 jobs in the headline number, the birth/death model assumes that a net 71,000 jobs were created.

This means that if the birth/death model had conservatively predicted that no jobs were created or lost, the headline figure would have been a loss of 311,000 jobs. If the birth/death model had actually calculated a net loss of jobs (which was almost certainly the case), then the headline number would have been even worse. This model is notorious for being way off at turning points. These figures will be revised in a big way at a later date.

It makes me wonder how many people we pay to sit at the Department of Labor and churn out this misleading random data.

Disclosure: The Rubbernecker is short useless models and 4 out of 5 statisticians.

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