Guest Post: How Bad Will Unemployment Get, And What Can We Do About It?

By George Washington of Washington’s Blog.

Unemployment is disastrous on both the individual and societal level.

Individuals who look for work but can’t find it are miserable. Indeed, most people who lose their job are unprepared for their circumstances.<1>

On the national level, high unemployment is both cause and effect concerning other problems with the economy. As we’ll see below, high unemployment results from a weak economy and - in turn - weakens the economy.

Until the causes of, and solutions to, high levels of unemployment are understood, we will not be able to solve the problem.

How High is Unemployment?

Before we can even start looking at causes or solutions, we have to understand what the current level of unemployment really is, and what the trends portend for the future.

Let’s use America as an example. With the largest economy in the world, it has often been said that “when America sneezes, the rest of the world catches cold”. And much of the rest of the world has adopted the “Washington Consensus” - America’s neoliberal view of economics.<2> Moreover, the rest of the world has been infected by many types of “toxic assets” invented in America, such as credit default swap derivatives<3>, as well as Wall Street style banking strategies. So I will use the United States has a case example, but will also touch on global trends.

Official figures put unemployment in the United States somewhere between 9 and 10 percent. But the official figures use a very different measure for unemployment than was used during the Great Depression and for many decades afterwards.

Specifically, the official unemployment reports of the Department of Labor’s Bureau of Labor Statistics (BLS) provide conventional “U-3″ figures and various alternative measures including “U-6″. <4>

For example, as of December 2008, U-3 unemployment was 7.2 percent, while U-6 was 13.5 percent. <5>

U-6 is actually more accurate, because it includes those who would like full-time work, but can only find part-time work, or have given up looking for work altogether.

As can be seen by the December 2008 figures, U-6 unemployment rate can almost double the more commonly-cited U-3 figures.

But those in the know argue that the real rate is actually even higher than the U-6 figures.

For example, Paul Craig Roberts <6> - former Assistant Secretary of the Treasury and former editor of the Wall Street Journal - and economist John Williams both said in December 2008 that - if the unemployment rate was calculated as it was during the Great Depression - the December 2008 unemployment figure would actually have been 17.5%.

Williams says <7> that unemployment figures for July 2009 rose to 20.6% <8>.

According to an article <9> summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart, U-6 unemployment could rise to 22% within the next 4 years or so.

As the New York Times pointed out in July<10> :

Include — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.

Indeed, the chief of the Atlanta Federal Reserve Bank -Dennis Lockhart - said in August 2009:


If one considers the people who would like a job but have stopped looking — so-called discouraged workers — and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent. <11>


Former Labor Secretary Robert Rubin notes:

Over the past three months annual wage growth has plummeted to just 0.7%. At the same time, furloughs — requiring workers to take unpaid vacations — are on the rise: recent surveys show 17% of companies imposing them. <12>

Temporary employment is still falling as well. <13>

And economist David Rosenberg points out:

65% of companies are still in the process of cutting their staff loads…

The Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented…<14>

In addition to the failure of official BLS unemployment figures to take into account discouraged and underemployed workers, many analysts argue that BLS’ “Birth-Death Model” severely understates unemployment during recessions. <15>

Many people - including economists and financial reporters - say that unemployment is much lower than it was during the Great Depression. What they mean when they say that is that current U-3 figures in America are under 10%, while unemployment hit 25% during the Great Depression.

But most people forget that the worst unemployment numbers during the Great Depression did not occur until years after the initial 1929 crash . Specifically, unemployment did not hit 25% until at least 3 years after the start of the Depression.<16>

As of this writing (2009), we are only a year into the current economic crisis. Therefore, we have at least 2 more years to go until we hit the same period that unemployment peaked during the Great Depression.

Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.<17>

And Chris Tilly - director of the Institute for Research on Labor and Employment at UCLA - points out that some populations, such as African-Americans and high school dropouts, have been hit much harder than other populations, and that these groups are already experiencing depression-level unemployment.<18>

Assuming that Williams, Roberts or Lockhart’s calculations of unemployment are correct (using the same methods of measuring unemployment as were used during the Great Depression), and depending on when we deem the current crisis to have commenced, then - as shown by the following charts - unemployment percentages may actually be worse than they were during a comparable period in the Great Depression:

continued>>>
http://www.nakedcapitalism.com/2009/09/guest-post-how-bad-will-unemployment-get-and-what-can-we-do-about-it.html

Charts at link