Thursday, August 27, 2009

Is Unemployment the Worst Since the Great Depression?

Is Unemployment the Worst Since the Great Depression?

By Matthew Bandyk
Thu Aug 27, 4:27 pm ET

The "Great Recession" is the name that has stuck for the economic decline that began in late 2007. But there's some reason to think that using the word recession is being kind.

The U.S. gross domestic product has shrunk 3.9 percent in the past year, the worst drop since the Great Depression. Plenty of observers are willing to say that this recession is much deeper than anything we've seen since the 1930s--including the big dip in the early 1980s, generally accepted as the other candidate for the worst recession since the Great Depression. "I think it's way worse today," says Ridgely Evers of Tapit Partners, a longtime entrepreneur and venture capitalist who founded the software company Netbooks (now known as WorkingPoint). In the recession of 1981 and 1982, "people recognized it as a dip. [Today,] nobody thinks we are going to come back out in relatively short order." This recession seems to have dragged on longer. According to the National Bureau of Economic Research (NBER), the U.S. economy was in recession from July 1981 to November 1982--16 months. But the current recession started in December 2007, says the NBER, so it's already longer than the last big one.

The NBER defines a "recession" based on the all-encompassing gross domestic product figure. That economy-wide statistic may not mean much to the average American. In other words, the question "What is the economy's output?" usually doesn't matter as much as "How hard is it to find a job?" When we look at that question, how does the "Great Recession" compare?

The unemployment rate is a murky number. It seems simple enough to look at the
national unemployment figures released every month by the Bureau of Labor Statistics. In July, that number was 9.4 percent. At the peak of the early '80s recession--December 1982--unemployment hit 10.8 percent.

So where's the murkiness? The problem is that many of the people one would think of as "unemployed" are not included in this unemployment rate. For one, the Bureau of Labor Statistics does not count unemployed people who have been discouraged by the labor market and have given up looking for work. You are counted as a "discouraged worker" if you are available to work, want to work, and tried to look for work in the past year but gave up within four weeks for reasons including the belief that no work is available. The fact that the national unemployment rate excludes these discouraged workers has led many observers to believe it does not reflect the "real" level of unemployment. "Ask the average person if he or she is unemployed, and there is little hesitation in giving you an answer, but that may not agree with government definitions," says John Williams, an economist who examines government statistics at

Other people who aren't counted in the official number are those who have been forced by the economy to work part time. The number of workers who wanted full-time jobs but could find only part-time work was 1.8 million last month, which amounts to 1.3 percent of the labor force. Still, that's not as bad as December 1982, when forced part-time workers accounted for 3 percent of the labor force.

What happens when you start counting all these people who have been heavily battered by the labor market? The Bureau of Labor Statistics has another rate that includes "marginally affected workers" and part-time workers. That number, referred to as U-6 because of its identification in bureaureports, was 16.3 percent last month--nearly 7 percentage points higher than the official unemployment rate. What's more, the number of people who have given up on finding work has been steadily rising over the past few months, from 685,000 in May to 796,000 in July. "If you have that number of people leaving the workforce, that seems to me a serious problem," says economist John Lott.

Many people are giving up because the labor market is so bad--but how bad historically? A U-6 rate of more than 16 percent certainly does not compare to the Great Depression, when a quarter of the workforce was unemployed. And Williams points out that a much larger number of workers were agricultural workers in the 1930s. These farm workers are not included in today's statistics. So, by his estimates, nonfarm unemployment was at 35 percent in 1933). Trying to compare that U-6 number with the early '80s recession gets a bit tricky. The U-6 measurement did not come into use until 1994.

Before that, the Bureau of Labor Statistics used a broader measurement, referred to as U-7, to figure out the number of unemployed plus workers dropping out of the labor force. In 1982, U-7 hit a peak of 15.3 percent, below the current U-6 of 16.3 percent. But 1982 should probably look even better compared with the labor market of today. U-7 overestimates the number of discouraged workers compared with how we measure them today. For example, the Bureau of Labor Statistics started asking people in surveys if they were actually available to work. These and other changes reduced the measurement of discouraged workers by 50 percent, according to some estimates.

So if you care not just about people who meet the official definition of "unemployed" but also about people who are dropping out of the labor force, 2009 seems to be trailing 1982 in terms of the health of the labor market. Williams says that when he takes into consideration people who haven't looked for work in more than a year because they can't find jobs, the real unemployment rate today goes all the way up to 20.6 percent by his calculations. "It won't take much to get it to the worst since the Great Depression," he says.

1 comment:

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