2008 December 07 Sunday
Underemployment Reaches Record High

Daniel Gross at Slate explains how different measures of labor underutilization show bigger declines in employment than the headline unemployment rate.

The data on people not in the work force show the number of people not looking for work because they're discouraged about finding jobs has risen from 276,000 in September 2007 to 467,000 in September 2008—up 70 percent. The percentage of people unemployed for more than 15 weeks stood at 2.3 percent in September 2008, up from 1.6 percent in September 2007, a rise of nearly 45 percent. But the most troublesome is the U6. The U6 is sort of the summa of job angst, a shorthand tally for the aggregate of job-related frustration. (Moneybox covered some of this terrain back in 2004.) To compile the U6, the BLS takes the number of unemployed, plus all marginally attached workers, plus all of those employed part-time for economic reasons, and then calculates that total as a percentage of the sum of the entire civilian labor force plus marginally attached workers.

The U6 in September rose to 11 percent, its highest level since the data series started in 1994 and significantly higher than it was in the last recession, in 2001.

That U6 number is already higher than in 2001 even though economists predict the unemployment rate will go much higher.

U6 has since soared even higher to 12.5%.

That rate (called “U-6”) in November? A whopping 12.5%.

This expected rise in unemployment will push mortgage defaults up much higher. How many more banks will fail as a result?

Moody's Economy.com now sees the unemployment rate peaking at 8.7% in the first quarter of 2010, rising from the 6.5% peak it forecast in September.

How much of an impact does unemployment have? Barclays Capital estimates that a 1% increase in the unemployment rate, like that between May and October, could push up losses on securities made up of pools of mortgages by as much as 35%.

The US unemployment rate hit 10.8% in 1982 and some economists are saying recession will be the deepest since WWII. So that opens up the possibility of double digit unemployment.

Ireland's unemployment might reach 12% in 2010.

The Irish economy is labouring under the collapse in residential construction and a severe decline in consumer spending and as a result unemployment is expected to reach 10 per cent in 2008 and may peak at 12 per cent in 2010, according to the report.

How bad does it have to get to call it a depression?

Richard Sylla, an economic historian at New York University, says that his rule of thumb for a depression would be double-digit unemployment rates lasting for more than a few months. The only times that occurred in the U.S. were during the Great Depression and the 1890s. The deep recession that ended in 1982 briefly saw unemployment rise above 10%.

Berkeley economic historian Brad DeLong’s definition of a depression is in a similar vein: Unemployment hits 12%, or it stays above 10% for three years.

Another measure of depression involves the size of the economic contraction. I do not expect to see depression levels of economic contraction. But the financial markets keep throwing up surprises. So hard to say for sure.

Update: In percentage terms the November 2008 job losses were only half the December 1974 job losses.

While in terms of raw numbers the November job losses are the largest since 1974, it is important to realize that the economy and labor market are much larger than they were in 1974. In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions.

So the 1973-1975 recession still looks bigger than the current recession. We would need to see a huge increase in job losses to get up into 1974 territory.

The November jobs report is one of the worst jobs reports in 30 years. Job losses totaling over a half a million is a very worrisome number. However, it is important to realize that the numbers are not as bad as the 1973-75 recession. The employment picture is already worse than the last two recessions, but right now the 1981-82 recession appears to be an apt comparison due to the increased relative scale of our economy.

One thing different today that gives policy makers a lot more latitude: much lower inflation rate. The Fed can do massive bond buying and take other measures to expand the money supply to counteract the contraction.

Share |      By Randall Parker at 2008 December 07 10:24 PM  Economics Labor


Comments
Ned said at December 8, 2008 5:22 AM:

The total amount of US consumer debt (mortgages, autos, credit cards, etc.) is slightly over $13 trillion. A bit more than half of that is mortgages, say, $7 trillion. Let's assume that only one fourth of that is toxic waste, which is a pretty conservative assumption. That comes out to $1.75 trillion. Now spread that over the entire GDP, which is about $14 trillion. That's a 12.5% contraction, which is tremendous. That's more than 3% off the GDP every year for four years, which is a huge recession. And this is based only on mortgage debt. This thing is only starting to roll - it's hard to see how we can avoid double-digit unemployment, since virtually no new job creation is taking place.

The Democrats won the elections this year, not because of the brilliance of their new ideas, but because the voters, not unreasonably, blame Bush II and the GOP for the current mess. But now the Democrats own it. In a year or so, when things are worse than they are now, calls for "hope" and "change" are going to sound pretty hollow. Considering that Obama, Frank, Pelosi, Schumer, Reid and Dodd don't seem to have a clue as to what to do, the Republicans will be thanking their lucky stars that they are not in power.

kurt9 said at December 8, 2008 10:05 AM:

I don't expect a depression. However, I do think we will have something analogous to the '73-74 recession. I think the underemployment rate will go to 15-17% (official unemployment will go to 10-12%). Do realize that 10% of the U.S. workforce was in financial services at the peak in 2006. The financial services industry itself will downsize to probably half of this. Also, the real estate and construction industry will downsize as well. Financial services will mostly be retail, which will serve people who are planning for retirement or are retired. The corporate/investment banking part of the industry has created essentially no value in the past 15 years. This, of course, will go away.

The democrats (under Clinton) are partly responsible for this mess with their efforts to protect Freddie. Fannie, and extending the CRA. But many republicans under Bush are also equally responsible. Steve Sailor has posted many comments on his blog recently about Bush II's efforts to promote no down payment policies to increase home ownerships among the lower classes. Also, once Wall Street tripped to the whole mortgage back securities money train scam, this took on a life of its own than neither democrats nor republicans can take the blame for.

The people to blame for this are the 1) democrats, 2) the Bush-type republicans, and 3) the Wall Street people.

Randall Parker said at December 8, 2008 7:34 PM:

Ned,

I agree the Republicans are better off letting the Democrats handle the recession.

Kurt,

I agree it will get much worse. The rising unemployment will push more houses into default which will drive real estate prices down even further which will cause more people to see their houses as so far under water that they'll stop making payments - especially on houses bought for investment.


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