The unemployment rate is tricky: sometimes it hides more than it reveals. At its core, it is supposed to be a simple formula:
Unemployment Rate = Jobless people actively seeking employment /
And when the economy is in good shape, it remains pretty simple. People can find jobs, and therefore, the unemployment rate is lower. Conversely, when jobs are scarce, we can expect the unemployment rate to be higher. This simplicity can disappear quickly when an economic crisis comes along. For example, the U-3 (there are many different standard unemployment rates, but if you see anything in the news about the unemployment rate, they are probably referring to the U-3) defines “jobless” people as those who are willing and available to work, and who have actively sought work within the past four weeks. The problem is that people eventually give up and stop looking for jobs.
After an extended time away from the workforce, dominos of sadness start to fall. We have plenty of research about this subject based on the Great Recession. Studies found that finances suffer: savings get depleted, debt increases, and people have trouble paying their rent or mortgage.¹ This, in turn, destroys one’s mental health, physical health, and self-respect. Most people can only take so much humiliation before they withdraw, both emotionally and from the labour force. The dominoes do not stop falling: when temporary unemployment becomes long-term unemployment, that results in skill erosion, worker discouragement, and employer discrimination, so long-term unemployed individuals are less connected to the economy than those unemployed for a shorter term.
Widespread unemployment is one reason economists are even more terrified about COVID-19 than the average person. When they look around the world, most of the data points to an economic crisis worse than anything they had ever imagined. The UN’s International Labour Organisation estimates that over 400 million people lost their jobs in Q2 of 2020. One economist that we spoke to put it like this: when evaluating an oncoming recession, economists are often looking at how the dominoes are going to fall, and whether it is possible to stop any of the dominoes from tipping over. In the case of COVID, the table holding the dominoes is collapsing, and their pre-existing tools are not equipped to fix it.
If we set the table, we can better see how badly it is wobbling. The following charts show unemployment rates around the world and what we can learn from them.
UNEMPLOYMENT RATES AROUND THE WORLD²
Monthly Unemployment Rate, USA, Aug 2019-present
- Locking Down: the response of the United States to the COVID-19 has been exceedingly imbalanced, inconsistent, and incoherent. In the beginning, the United States began to lock down very slowly, and often not to great effect. As such, the US’s ability to jumpstart the economy to gain back lost jobs is thought to be weaker than that of comparable countries.
- Before COVID-19: Before COVID-19, the United States was nearing record-low unemployment. Up until February, this was thought to be one of President Trump’s main advantages that might propel him to re-election. By April, unemployment increased to such a level that was not even witnessed in the Great Depression of the 1920s.
- Long-term Trends: Although some may take solace in the downward trend seen in May and June (as compared to April’s peak), this trend should not assuage any worries. In many places, many of the jobs lost in March and April are not coming back. For example, government estimates predict that as many as 1/3 of the small businesses in New York City that closed due to the pandemic will be closed forever.
- GDP: The Commerce Department reported that the pandemic resulted in the sharpest economic contraction in modern American history: 32.9%. For perspective, the previous record was 10% in 1958.
Monthly Unemployment Rate, USA/Germany, Aug 2019-present
- Kurzarbeit: Recent measures taken by the German government to protect jobs have led to a much less marked short-term spike in unemployment. Germany’s “kurzarbeit” is a short-term work programme that dates back to the early 20th century. It allows companies facing economic distress to reduce the working hours of their employees instead of firing them. The German government then provides workers with an allowance to partly make up for the reduced wages.
- German GDP: The consensus is that German unemployment will continue to rise in the near- and long-term future, but this short-term programme has reduced the fallout. Nevertheless, COVID is still an economic catastrophe for Germany: its GDP dropped by 11.7% in Q2 2020, according to the Federal Statistical Office. For perspective, GDP fell only by 4.7% in Q1 2009 during the Great Recession.
Monthly Unemployment Rate, USA/Germany/EU27, Aug 2019-present
USA and Germany and EU27
- Closures: much of the EU, with some exceptions like Sweden, closed down very quickly and strictly in response to the virus. It is thought that the quick response has allowed the EU to open up quicker than other places, although some countries have been criticised for re-opening haphazardly.
- Short-term Unemployment: Before COVID, more than half (58.6 %) of those unemployed in the EU have been unemployed for less than one year. Based on COVID, we can expect this “less than one year” share to decrease. However, this average hides large differences between EU Member states. More than 86 % of the unemployed in Sweden were in this group, followed by Denmark (83.6 %), Finland (82.4 %) and Estonia (80.0 %). Greece is on the other end of the scale, with 29.9 %, followed by Slovakia (41.8 %), Bulgaria (43.4 %) and Italy (44.0 %). In Greece in 2019 about half of the unemployed persons were looking for a job for more than two years, followed by 42.2 % in Slovakia and 38.4 % in Bulgaria.
- GDP woes: Compared with the same quarter of the previous year, seasonally adjusted GDP decreased by 15.0% in the euro area and by 14.4% in the EU in the second quarter of 2020, after -3.1% and -2.5% respectively in the previous quarter. These were also by far the sharpest declines since this statistical series began in 1995.
Monthly Unemployment Rate, USA/Germany/EU27/Japan, Aug 2019-present
USA and Germany and EU27
- Differences from the West. Japan’s unemployment figures have historically been far below those of the West. There are many reasons for this, but to put it as simply as possible, the work culture in Japan is entirely different. For example, many companies offer some of their workforce — so-called regular employees — a long-term employment guarantee up to a mandatory retirement between age 55 and 60 years (“lifetime employment system”). Moreover, even more important, the division of annual labour income into basic wages, overtime premiums and bonuses allows companies to adjust wages flexibly to changes in macroeconomic supply and demand conditions, resulting in low rigidities of both nominal and real wages.
- GDP History: Japan also experienced its worst economic shock in history with a seasonally adjusted Q2 GDP drop of 7.8%. Compared to the previous quarter, the decline was 27.8%, a record for Japan. For comparison’s sake, the last quarter-to-quarter contraction was 17.8 per cent contraction in the January to March quarter of 2009, at the onset of the Great Recession.
Monthly Unemployment Rate, USA/Germany/EU27/Japan, Sep 2007-present
CONCLUSION: THE UPHILL BATTLE
The unemployment rate is considered to be a lagging indicator. When there is an economic downturn, it usually takes several months before the unemployment rate begins to rise. Once the economy starts to pick up again, employers usually remain cautious about hiring new workers, and it may take several months before unemployment rates start to fall. This means that it is still too early for us to see the total devastation wrought by the pandemic. As we can see in the data dating back to 2008, it may take several years before the unemployment rates start to fall like they did after 2011. Even if COVID is cured quite soon, the economic devastation will take years upon years to undo.
¹Rich Morin and Rakesh Kochhar, “The impact of long-term unemployment: lost income, lost friends—and loss of self-respect,” A social and demographic trends report, Pew Research Center, July 2010.
²Unless otherwise noted, all data comes from OECD (2020), “Labour: Labour market statistics”, Main Economic Indicators (database), https://doi.org/10.1787/data-00046-en (accessed on 15 September 2020).
These charts are programmed to update automatically with the latest data, so data after September 2020 was not yet available when this article was first published.