Unemployment in 2009 and its Implications for the U.S. Economy

Abstract

The current recession’s impact on unemployment has been more pernicious than even the usual indicators show. The underemployment rate – which also counts part-time workers whose hours have been cut or would like to be working full-time – is almost certainly at its highest level since the Great Depression. The proportion of workers who have been jobless for over 15 weeks is the highest since the 1930s. And over 7.25 million jobs have been lost since the recession’s inception in December 2007. However, we maintain we are not merely experiencing a deep recession. Rather, we believe the current financial crisis can properly be viewed as a systemic banking crisis due to its sharp credit contraction, preceded by a housing price bubble and credit expansion. The unemployment rate is likely to peak at 11.5 percent if today’s crisis turns out to be similar to past credit crunches. A vicious cycle with a feedback loop may continue to develop. Rising unemployment rates lead to heightened foreclosures, causing economic activity to slow and further exacerbating unemployment. And the economic slowdown – coupled with the diminishing impacts of the stimulus program and the potential effects on the economy of withdrawal of the country’s large monetary and fiscal stimuli – may increase the risk of a double-dip recession.