Unemployment During the Great Depression: Are We Getting Close?

December 19, 2008

Each week delivers more grim news about some part of the economy, including job cuts and climbing unemployment. All the gloom-and-doom has some recalling unemployment during the Great Depression. At this point the U.S. unemployment rate is 6.7 percent, according to the Bureau of Labor Statistics; peak unemployment during the Great Depression was 25 percent. Are we inching toward a similarly unsavory fate?

Some say it wouldn't be impossible. Henry Blodget noted on Yahoo Finance that unemployment during the Great Depression climbed from less than 5 percent in 1929 to its 25-percent high in 1933. The downward spiral was an incremental one. He also said if we calculated unemployment the same way we did during the Great Depression, "our unemployment rate would be much higher."

Others offer a different take. Donald Luskin, chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors, wrote in a piece in SmartMoney that the current recession is nowhere near as dire as the Great Depression because our political and financial leaders aren't making the same mistakes, including tax hikes, protectionism, bank failures and tight money.

Unemployment During the Great Depression May Have Been Worse, But a Bumpy Road Awaits

Whether we'll reach the levels of unemployment during the Great Depression is yet unknown, but many experts say the situation will get worse before it improves. Federal Reserve Bank of Dallas President Richard Fisher indicated this week he thinks unemployment will reach 8 percent and may surpass it. According to a Wall Street Journal story, "Mr. Fisher said he expects the economy will contract through 'at least' the first half of next year, as many forecasters also predict."

Do You Know What You're Worth?

Heidi Shierholz, an economist at the Economic Policy Institute in Washington, said in an interview in late October that we wouldn't likely reach the 25-percent unemployment of the Great Depression, but that family incomes wouldn't recover for a few years. Earlier this month, Shierholz said that to have a better understanding of what's happening with the job market, it's important to consider the underemployment rate–not just the unemployment rate. Underemployment includes workers who report wanting a job and being available to work, but they're no longer actively seeking work. It also includes involuntary part-time workers, those who want but can't get full-time work. The November underemployment rate was about 12.5 percent, or 19.6 million, according to Shierholz.

She also pointed to the employment rate for men–who typically have higher rates than women–as an indicator of how strained the job market is. In November, the employment rate for men was 67.5 percent, the lowest it has been since 1948, when the Labor Department started collecting the data.

Meanwhile, employment consulting firm Watson Wyatt has released a survey showing 23 percent of companies planning layoffs in the next year, and 39 percent having already done so.

The pain is widespread. But Shierholz offered a glimmer of hope. "I think 2009 is going to be a rough year, and hopefully we will pass a good stimulus package, and hopefully things will take hold and change in 2010," she said. "Even in a deep recession, most people will keep their jobs, even if unemployment reaches 10 percent. We are facing a huge crisis, but it's not a total collapse."