Why Unemployment Could Hit 14%

Today unemployment stands at 9.5 percent. That's awful, and it's far worse than the Obama administration envisioned at this point, even without a nearly $800 billion stimulus package passed in January. But it's not the worst we've had in the last 30 years. In late 1982, unemployment hit 10.8 percent. Some economists suspect we could hit that mark by early next year. How high could unemployment climb in this recession? Twelve percent? Thirteen percent? Here's the argument for a 14 percent peak:



Here's the reasoning, from Louis Woodhill, from the Leadership Council of the Club for Growth.

Because a lot of PBI [private business investment] goes toward offsetting depreciation and increasing productivity, it takes a 5% year-over-year increase in PBI to produce a 1% increase in the number of jobs. Correspondingly, a 5% decrease in PBI will yield a 1% reduction in total employment.

The unemployment rate a year ago was 5.5%. Because the potential labor force is growing, we need employment to increase by 1% annually to keep the unemployment rate from going up. The 37.9% investment decline reported by the BEA [Bureau of Economic Analysis] can be expected to eventually produce a reduction in total employment of about 8.5%. Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of PBI is reversed.

As my colleague Dan Indiviglio pointed out, that 14 percent is a slippery number, for a couple reasons. First, employers aren't necesssarily resorting to lay offs. They're also cutting hours, instituting furloughs, mandating vacations, freezing hires or freezing promotions, and so on. Furthermore, total unemployment -- which includes: the officially unemployed; part-timers seeking more hours; and hundreds of thousands who have given up looking -- is probably already at 16.5 percent, already.

To be sure, "total unemployment is at 16.5 percent" doesn't pack the psychological wallop even of "unemployment is now in double digits." But the point is that even if Woodhill's analysis is spot on, unemployment is such a tricky concept to measure, and firms have so many different ways of shaving hours without cutting their staff numbers, so I'm not sure that the 5-1 ratio of investment to employment necessarily holds. But it's still an interesting thought.