A Short Note: Insights on the Current Unemployment Rate and the Business Cycle

Abstract

As the election of 2008 approaches most of the attention of investors and workers is on mortgage defaults, the banking crisis and the stock market. Important changes occurring in the labor market are being overlooked. The monthly unemployment rate in August 2008, 6.1%, is around the 70th percentile of the 1949 to 2008 time period. The change in the unemployment rate between August 2007 and August 2008, 1.4 percentage points, was unusually large by historic standards for an economy that officially remains in an expansionary period. The unemployment rate is a lagging economic indicator and an increase in unemployment of this magnitude is more consistent with an economy in a recessionary or post recessionary period than for an economy in an economic expansion. If the new president inherits an economy that enters a recession the unemployment rate at the start date of the recession is likely to be higher than the unemployment rate at the start-date of most post World War II recessions. The average increase in the unemployment rate between the start date and end date of the last 10 recessions was 2.6 percentage points. On average, unemployment remained 1.7 percentage points higher nine months after the end of a recession than on the start date of the recession.