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During the Great Depression the unemployment rate hit 25%. We're flirting with 9% in California. But can you compare unemployment rates across the decades?

Obviously the unemployment rate doesn't include anyone who stopped looking for work, so it tends to understate things. That distortion is often discussed. But there's also a problem in comparing the rate across decades. There has been a huge surge in the number of small businesses over the past fifty years. Many are the "buy yourself a job" type, meaning your income during good years will be about the same as if you had a normal job and salary. But what happens if the economy sours and all of those people who appear to be working at their small businesses are actually using their savings to stay afloat? Can you really call those people employed?

I would argue that any self-employed person, and any small business owner who is losing money, or using savings to stay afloat, is functionally unemployed, or at least underemployed. I wonder what the unemployment rate would be if you included those people, so you had a better apples-to-apples comparison with the Great Depression.
 
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Mar 9, 2009
@ScottJBennett:

I don't agree that people "want" this to be The Great Depression II, even though I see how one could come to that conclusion from the way that people talk about it.

Honestly in my opinion---(but I'm no economist and this comes more from my experience with understanding psychology than it is economics)---but I truly believe that a significant portion of this depression--I would almost go as far as to say maybe 50% of it---is from the constant and continuous reports on the economy... an economic self-fulfilling prophecy, so to speak.

News agencies begin discussion on a newly released report on another increased in unemployment. As new reports continue to cite higher unemployment rates it plays to a nagging little fear of losing their job, being unable to support their family, losing their home, etc. that rests deep within everybody... regardless of how likely it is in reality of happening to them their spending becomes more conservative, just in case things *do* get worse. In turn, retail and other sales slow down as people hold off on non-essential purchases. Next month, news agencies report on the continuing worsening of the economy as retailers reported that sales fell 2% over last year. Rinse and repeat.

And this applies on the corporate level, as well... if one of a company's competitor in their market goes under the execs in the company start to panic... if it happened to that company it could happen to them too and the company begins to operate more conservatively causing the whole cycle to repeat.

If I am right and the only thing holding the economy back from returning is the fear that it is getting worse, then the economy could be put back on the right track by passing as stimulus bill which most experts from both parties agree will be effective---regardless of how effective it actually is. As long as consumers and Wallstreet are assured it is a sure-fire plan then consumers and investors will becomes less conservative and will in-turn actually re-stimulate the economy.


I could very well be wrong, though... my knowledge of economics are limited to the three three semesters I took in college, so I welcome anyone that can explain where it is weak (in terms of economics, not in implementation).

 
 
Mar 9, 2009
Note that the government tracks (roughly) the underemployed, although not the small business owners you are discussing here. A more reasonable unemployment figure to compare to the 1930s is U-6, rather than U-3 (the most commonly referred to number). U-6 as of Feb 2009 stood at 16% or 14.8% after !$%*!$%*! for seasonal factors. Of course if you throw in the small businesses with little business you might get another 10% increase in this number to ~25%....

http://www.bls.gov/news.release/empsit.t12.htm
 
 
Mar 9, 2009
I think it's comparable considering that 25% of the population during the Great Depression was approximately 30,797,000 while 9% of our current population is 27,344,217. Pretty darn close, IMO.
 
 
Mar 9, 2009
Don't forget that a large percentage of the people who were "employed" in the 30's were employed as dirt farmers, or building bridges to nowhere for the WPA and CCC. If we're not going to count self-employed people today, I don't think those people should count either. True unemployment and underemployment in the 30's was probably over 50%. Talk to your grandparents about those days for some perspective. There were people who couldn't afford food.

I know everyone wants this to be the Great Depression II (although I can't understand *why* people want this so badly), but it just isn't so. Spend a couple hours in a coffee shop and count the number of people paying $4 for a cup of coffee. That should disabuse you of any notion that this is a depression. People in my neighborhood are opening new restaurants, and filling them with paying customers. In the 30's regular middle class people were waiting in line for free bread and soup. We look childish when we stamp our feet and claim we've got it as bad as they did.

This is a fairly chaotic unwinding of an unsustainable housing bubble (and the accompanying unsustainable debt that fueled it). The treatment hurts, but it had to be done.
 
 
Mar 9, 2009
Scott,

The traditional unemployment number is referred to by economists as U-3 (For Unemployment level 3) this is defined by the Bureau of Labor Statistics as "Total unemployed, as a percent of the civilian labor force". But as you have mentioned this number is highly misleading. Luckily the BLS presents us with several "alternate" measures of underemployment as well. A often cited number is U-6, which in addition to U-3, also include Marginally Attached Workers, people employed part time for economic reasons, plus discouraged workers. As of February this number was 14.8%. I still don't know how well this number compares to older data from the Great Depression, but to some degree looking at these alternate measures (Found at the link below) can shed better light on what is going on in the economy.

http://www.bls.gov/news.release/empsit.t12.htm

 
 
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Mar 9, 2009
for Dilgal

Read "The Two Income Trap" for some thoughts on 1-income vs. 2-income households. 1-income households are more financially secure. (read the book for details). Basically, a household with 2 incomes depends on both to pay the bills. Lose just one & trouble starts. The single income household can have 2 people looking for work until one of them finds a job.

Women's lib was a good thing, but double earner households screwed themselves.
 
 
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Mar 9, 2009
This issue was recently addressed by a guest on the NPR Planet Money podcast (which I recommend):

http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890

They also briefly cover other details that go into how that number is counted (like whether you count people in prison or on probation). The upshot is, as I understand it, is you can get the adjusted numbers that are calculated in the same way, but it's still hard to compare due to other factors (i.e. the growth in incarceration rates).
 
 
Mar 9, 2009
FINALLY someone asks the right question!!! Thank you Scott, for asking a question that for some reason the mainstream media never seem to ask. Unemployment does not count long term unemployed, underemployed (which is a LOT more important now with huge ranks of individuals working part time with no benefits) or, as you mention, small business owners running at a loss. And while we do have a lot of two income households, we also have a cost of living that is pegged to match.

On the flip side, you have an inflation rate that excludes gas and food. You also seem to have a bunch of people that think the middle class can afford $2000 rent, $4.00 gas, dollar an ear corn and have enough left over for expensive consumer electronics and cars, while being shifted to part time with no benefits. I've got news for ya....this recession didn't start with the subprime "crisis". It started with the middle class being squeezed like a zit.
 
 
Mar 9, 2009
YITBOS and manpace bring up a good point - A better measurement of the misery generated from unemployment may be to measure the # of households where no one is working.
 
 
Mar 9, 2009
And it is going to get a lot worse still. I read that you describe yourself as a staunch optimist . But isnt the problem with being an optimist that you get disappointed much more often ?
 
 
Mar 9, 2009
@ jakesdad - why can't the unemployment rate (read: single vector metric) tell us anything useful about employment. I think having a summary statistic regarding the number of unemployed people is actually quite useful as a gauge of the labor market. Is it the be all end all? Obviously not, other data should be considered when making policy decisions. The point of the post is in making a cross-temporal comparison of this summary statistic.

The inclusion of struggling small business owners is interesting. Is there any way that such a person could qualify for unemployment or other assistance? If not, this is a significant downside to starting a business that is rarely mentioned; Not only do you lose money that you invested into a failing business, you then lack the societal safety net provided to "regular" employees.
 
 
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Mar 9, 2009
The huge factor you are missing is the preponderance of DINKs in the economy right now. Many unemployed married/committed folks have spouses still working. During the depression a much higher percentage of lost jobs meant no more income for an entire family.
 
 
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Mar 9, 2009
I've seen this type of comment elsewhere, but here's a Reuters link: http://www.reuters.com/article/marketsNews/idUSN0944970920090309

It addresses the farming unemployment issue. I've also read (in multiple localtions, all seem to corroborate) that unemployment is calculated differently now versus in the 1930's. Something along the lines that folks who have been out of work > 12 months are no longer considered "unemployed"; during the 1930's these folks were counted among the unemployed numbers.
 
 
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Mar 9, 2009
I would think it is also worth noting that during the time leading up to/during/after the Great Depression, most families were single-income households with the husband working while the wife took care of the children and household... They surely must not have included housewives as unemployed (otherwise we could easily expect the unemployment rate to be >50%, even during periods of economic growth)... but moreover I wonder whether or not they considered housewives as "employed"?

 
 
Mar 9, 2009
I bet there were more independent farmers not getting counted then compared to self-employed people running at a loss now. I have nothing to base that on, other than a gut feeling that Grapes of Wrath paints a pretty bleak picture that I can't see happening today.
 
 
Mar 9, 2009
I believe "they" also track things like numbers of underemployed, unemployed for longer than 6-12 months, unemployed-not-looking, etc. I saw a recent figure in the newspaper that, when all varieties of unemployment are considered, pegs the rough "total" (in my little corner of the Midwest) at around 15%.
 
 
Mar 9, 2009
I would argue that ANY single-vector metric is inherently too simplistic to tell you anything useful about employment. in fact I can think of few (if any) single-vector metrics that can tell you anything useful about the modern world economy. VaR has three components (temporal, magnitude & probablility) and even _IT_ has been shown to be a gross oversimplification that people's over-reliance on is at the heart of this mess.
 
 
 
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