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Monday, October 11, 2010

The unemployment problem

Brad DeLong notes that the unemployment rate has now been at or above 9% for 17 months, from May 2009 through (so far) September 2010. And he's not alone in being concerned about the persistence of extremely high unemployment (Ezra Klein; Paul Krugman; Adam Posner (no link); and many others).

Looking back at the monthly data, we see that only in the twin recessions of 1979 to 1983 and the current recession did the unemployment rate rise above 9% for any significant period, 19 months in the earlier case (March 1982 to September 1983) and 17 (so far) in this one. Even more disturbing, the unemployment rate has been above its post-World-War-II average (of 5.7%) now for 27 months.*

Why do we think this is a problem? As DeLong and Krugman, again among many others, have pointed out, what starts out as cyclical unemployment resulting from a recession can become structural. The longer unemployment (or intermittent employment punctuated by additional spells of unemployment) persists, the more likely people are to see their skills decay and the harder it becomes for them to become re-employed.

While we don't know the precise dimensions of this, or how long it takes, it is something to be concerned about.

But (to be optimistic), we also know that a sufficient increase in aggregate demand leading to a sufficient increase in the demand for labor can drive unemployment down quickly and a lot. Our experience from the Great Depression at least indicates that this is true. The overall unemployment rate** was above 15% in every year but 2 from 1931 to 1940 (except for 1937 and 1940; in both those years, the unemployment rate was about 14%), falling to 1.9% by 1943.

So, given sufficient resolve, it seems to me, and a sufficiently large set of programs designed to produce employment opportunities, it seems to me that we still have the ability (and the opportunity) to reduce unemployment significantly and to dodge the quicksand of structural unemployment. The question is whether we have the will.

*The economic malaise of the late 1970s and early 1980s will not soon be approached, though. Back then, the unemployment rate remained above 5.7% from September 1974 through March 1988--163 consecutive months!

**I'm not going to get into the controversey here about how to count people working under such programs as the WPA, PWA, CCC, and other New Deal temporary employment programs. (But, to the extent that one wishes to argue that the unemployment rates shown in the Statistical Abstract, for example overstate the extent of unemployment, one would have to acknowledge that the employment programs of the federal government were responsible.)


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