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.