The Wilder View

How high will the unemployment rate go?

The Bureau of Labor Statistics reported that there is a lot of slack building in the economy: the October unemployment rate rose to 6.5% and the total number of jobs lost in 2008 grew to 1.2 million. The question is, for how long will the labor market contract (unemployment rises)? If the contraction is anything like the contraction in 1957-1958, the unemployment rate could rise to 9.5%. You thought that I would say 1982, right? Well, read on.

I look to previous cycles for a clue as to how severe the 2008-2009 labor market contraction could be. This cycle does not have to be like previous cycles, but here we go.

The chart lists the historical unemployment rate spanning the years 1951-2008. The noticeable peak occurred in 1982, where the unemployment rate hit 10.8%. This is certainly the highest compared to all labor market contractions since 1953, but the unemployment rate was already above 7% when the contraction started. So it’s a little unfair to compare the current 6.5% to 10.8% when the unemployment rate was just 4.8% in February 2008.
This Table (click to enlarge) should be familiar to my readers, as I used a similar version in this post. The 1981-1982 contraction produced the longest consecutive monthly decline in nonfarm payroll, 17 months (column 3), and the most job loss, 2.8 million (column 4). Furthermore, the 1957-1958 and 2001-2002 labor market contractions each saw around 2.2 million jobs lost over 10 and 15 consecutive months.
Let’s put the job loss in relative standards since the labor force grew over the 1953-2008 period. The better comparison across time would be the accumulated job loss as a percentage of the payroll (column 6), rather than the accumulated job loss in levels (column 4).Column 6 lists the implied job loss for the 2008 contraction when the accumulated job loss for each contraction is compared to the magnitude of the nonfarm payroll payroll at the time (calculation is column 5 times the current size of the payroll in 2008). The most severe labor contraction occurred in 1957-1958 with an implied 5.9 million jobs lost in just 10 short months. The second largest payroll decline occurred in 1981-1982 with an implied 4.3 million jobs lost, followed by the 2001-2002 contraction, and then by the 1990-1991 contraction.forecast_unemployment_chart.png– The chart above shows the implied 2008-2009 unemployment rates across the same five cycles; the implied nonfarm job loss (column 6 in the table) is used to extract the unemployment rate for each cycle. Using the method highlighted below (Appendix below my name), the peak 2008-2009 unemployment rate implied by the previous cycles would be: 9.5% for the 1957-1958 contraction, 8.5% for the 1981-1982 contraction, 7.2% for the 2001-2002 contraction, and 7.0% for the 1990-1991 contraction.

I expect that the unemployment rate will rise to 7.8-8.3%: not as bad as the job destruction seen in the 1957-1958 contraction, but somewhere between that seen in the 2001-2002 and 1981-1982 contractions.

Rebecca Wilder Appendix: How I calculated the unemployment rate going forward. I use the average monthly labor force growth rate over the last 3 years to calculate the new labor force in each month. Furthermore, I allow for a 17 month contraction (the longest consecutive labor contraction in column 3 of the table) to calculate the number of people that are unemployed each month. Going forward (post October), the number of people that are unemployed is a simple average over 7 months (the remaining months in the forecast) of the difference between the implied job loss for each cycle (column 6) and the 1.2 million jobs that have already been lost to date. The unemployment rate for each month is the percentage of the labor force that is unemployed.

Originally published on November 13, 2008 at News N Economics and reproduced here with the author’s permission.

4 Responses to “How high will the unemployment rate go?”

RichardNovember 16th, 2008 at 8:35 am

I still see high paying jobs posted on employment sites (professional networking) (aggregated listings) (matches jobs based on your skills)Dont let them tell you the sky is falling.

the economic fractalistNovember 16th, 2008 at 3:34 pm

Kindly review this posting in two years. It is another example of linear thinking and will serve as another illustration for the advantage of the science of nonlinear saturation macroeconomics.

GuestNovember 17th, 2008 at 8:27 pm

Forget the “kindly review in 2 yrs” stuff. This kind of alleged analysis is already clearly ridiculous although pleasingly sophistic. It is silly to use those past recessions as guides or touchstones because none of them were world-around as this one is shaping up to be. No. We are in for something that will feel like a mini-Great Depression to most Americans, and worse than that in the rest of the world. And that assumes oil prices do NOT rise again and provide a further shock and draining of income for discretionary consumption. All in all, such “thinking” is quite stupid.

CWWJDecember 16th, 2008 at 8:53 am

It is simply not true than none of our previous recessions were worldwide. It’s just that the world was a very different place during the Cold War when Russia and China were in permanent economic stagnation and much of the rest of the world, including India, Africa and all of South America, was undeveloped. Now, with the rise of free trade and the interdependence of a truly global economy, a downturn in the U.S. will inevitably be reflected around the world.

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