Rising Unemployment Adds to Struggling Economy

by Craig Jennings, 9/9/2008

When the Labor Department released its monthly unemployment and jobs data on Sept. 5, it reported that the unemployment rate for the month of August was 6.1 percent. The 0.4 percentage point increase over the prior month has pushed the unemployment rate to a five-year high and is the latest indication that the economy continues to deteriorate. Recessions are officially designated by the Business Cycle Dating Committee (BCDC) at the private, nonprofit, nonpartisan National Bureau of Economic Research (NBER). NBER defines a recession as:

...a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

The news media typically cite the definition of a recession as "two consecutive quarters of negative GDP [gross domestic product] growth." However, NBER's definition is broader. While NBER "views real GDP as the single best measure of aggregate economic activity," it also considers personal income, employment, industrial production, and wholesale and manufacturing sales.

At 6.1 percent, the unemployment rate is well within recession territory and shows little indication that the 9.4 million unemployed people will return to the payrolls in the short term. Since August of 2007, the number of unemployed people has increased by 2.2 million, and the unemployment rate has ticked up 1.4 percentage points. As the graph below shows, during the last recession (March 2001 through November 2001), the unemployment rate increased 1.2 percentage points from 4.3 to 5.5 percent, but the economy continued to shed jobs during the recovery as the unemployment rate peaked at 6.3 percent 19 months later.

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The Labor Department measures unemployment by several methods; however, the most commonly reported measure, the one cited above, is known as the "U3" measure and counts only those people actively seeking employment. This ignores those too discouraged by their prospects to look for employment. Another, broader measure, "U6," includes "marginally attached workers...plus total employed part time for economic reasons." By this measure, as Paul Krugman notes, the employment outlook is "worse than it was in the aftermath of the 2001 recession."

Paralleling the increase in unemployment is the number of people applying for unemployment insurance (UI) benefits. Since the beginning of this year, the four-week moving average of first-time UI claims has increased from about 343,000 to 438,000, a 28 percent increase. Similarly, the number of people who have claimed UI benefits for consecutive weeks has increased 27 percent, from 2.7 million in January to 3.4 million at the end of August. The Wall Street Journal's blog Real Time Economics has noted that economists view these UI claims as "arguably in recession territory" and that "there is no question this looks very bad indeed."

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The increase in the number of people looking for work can largely be attributed to the number of job cuts by employers. Since the beginning of the year, the economy has shed over 600,000 jobs, and each month has seen net job losses. However, this number is buoyed somewhat by the growth in government jobs, which increased by 153,000 while private employers slashed their payrolls by 758,000. The last time the economy saw eight consecutive months of job losses was in May 2002, at the end of a15-month period of payroll cuts precipitated by the 2001 recession.

Congress attempted to stem the tide of this economic downturn earlier this year when it approved tax rebate checks for the majority of Americans. While these checks did stimulate consumer spending and are likely the cause of a significant bump in economic growth in the second quarter, they did little to slow the deterioration of the economy.

This summer, Congress acted again, this time to help those already hit by job losses and the poor employment atmosphere. In light of rising unemployment, Congress voted to extend UI benefits in July, allowing people who exhaust the 26 weeks of state unemployment benefits to qualify for another 13 weeks of federal assistance. This policy has been enacted in the past, particularly when the ranks of the long-term unemployed swell, as is happening in 2008.

Yet even those people who have maintained employment are not immune to the declining economy. Although real average weekly earnings have stagnated since December 2001, a precipitous drop in worker paychecks that began in September 2007 has yet to abate. Worker pay is now just above what it was in September 2005, and excepting that month, one has go back to almost ten years to September 1998 to find earnings levels as low as they were in July of 2008.

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Until the Bureau of Economic Analysis reports consecutive quarters of negative GDP growth (economic contraction), headlines proclaiming a recession will remain relegated to economic blogs. Yet for millions of families who have lost a primary source of income or have seen a significant drop in pay, regardless of the headlines, they are currently living a recession.