The Unemployment Report is Overstating Small Business Job Creation
Posted by Michael A. Kamperman on September 20, 2009
One of the controversial components of the way the unemployment report is calculated is the birth death model. The model was fully adopted in 2003 and is now part of the unemployment report. The model is designed to estimate the number of new small businesses started each month versus the number of small businesses that close down each month. This model has consistently added jobs to every monthly unemployment report and has yet to subtract jobs. Hence the controversy since everyone is seeing more local businesses close down than open up in their neighborhoods. But I think arguing only about quantity misses the point. We should also be debating the quality of new jobs being formed in America. The CEO of Office Depot Steve Odland said this morning on Fox News Sunday that his company is not seeing a recovery in the economy. He said most of the new jobs in America are created by small businesses. Most people starting a small business use either home equity loans or credit cards to start their businesses. This form of credit is extremely tight right now and new sources of credit have not emerged for entrepreneurs. He also claimed very little of the stimulus money is targeted to reach small businesses. Basically, if you lose your job it is currently very difficult to turn around and start a real company that provides a living wage for its owner and workers. Yet the birth death model has not been adjusted for the new credit environment and is still assuming we are partying like its 2006.
The New York Times profiled some of the new jobs created by the recently unemployed now known as accidental entrepreneurs. It noted that the Kauffman Foundation’s Index of Entrepreneurial Activity showed a slight uptick in 2008 over 2007 in entrepreneurship. However, Kauffman said “the patterns provide some early evidence that ‘necessity’ entrepreneurship is increasing and ‘opportunity’ entrepreneurship is decreasing.” Examples of these new companies were a brother and sister who sold 70 bicycle bags to hold keys and wallets for an average of $30 per bag, a former Lehman Brothers employee who started a college recruiting consultation company but has yet to sign up her first client, and a mother and daughter who started a cookie company with sales reaching $300 per month. These new “jobs” cannot provide a living wage and are really sidelines and hobbies. Yet if these people report to the Department of Labor they have started a small businesses they are counted as self-employed and not unemployed. It is no wonder then that Bank of America’s credit card charge-off rate has reached 14.5% and is now deviating substantially from its normal historical correlation with the official unemployment rate which is currently 9.7%.
The credit crisis can be fairly blamed on the credit rating agencies for placing the AAA rating on pools of loans to homebuyers with no money down, no job, and bad credit. However, it is economists and their failed econometric forecasting models that are preventing additional and meaningful federal government support for job creation. These alchemists defend an unemployment report that relies on the unadjusted birth death model, a GDP report that relies on net exports, and a CPI report that relies on owner equivalent rent as accurate estimates of true economic activity. It is clear these emperors of economic thought have no clothes. We need someone who is respected in the profession to call for a complete overhaul of how we measure the economy. If economists keep inputting garbage data into their models they will continue to get garbage out. Rather than trusting estimates of economic growth for the second half of 2009 and for all of 2010 they should listen to the warning of Office Depot’s CEO that without access to credit the small business job creation engine in the U.S. remains gassed out. We can keep kissing the real economy goodbye until we find a way to get the fuel of credit to small businesses whether they were created because of opportunity or necessity.
