Are We Overreacting to Unemployment Numbers?

BY busadmin  February 25, 2009 at 10:59 AM EDT

Employment guide; AP photo

Question/Comment: In the early ’80’s unemployment was over 10 percent. I’m old enough to remember what the economy was like at that time. It wasn’t pretty given interest rates, but on the other hand we weren’t considering massive government funding to increase the number of jobs in the market.

So I’m curious. Why is it today – banking crisis aside – that we are reacting so extremely to the unemployment piece of the economy? Well, here’s a thought. Aside from the need to prevent a financial crisis and economic meltdown, I’m thinking that the unemployment situation is being grossly distorted though I’m not sure where to look for the facts on this.

Could it be that we have become much more dependent today on the two-income family then we were a quarter century ago. Could it be that our entire economy is driven by the fact that our subsistence (food, housing, clothing) is priced such that it now takes two workers to support a family? Given that assumption, could it be that a seven percent unemployment rate could actually have considerably more negative impact than say a 10-11 percent unemployment rate of a quarter century ago?

Paul Solman: A barrel-load of questions packed into this email. Let me take on a few.

First, we ourselves have done research on the unemployment comparisons between then and now.

In that 2003 piece, we concluded that the current 6.2 percent unemployment rate was indeed comparable to the previous post-WWII high of 10.8 percent in 1982. The basic reasons: the elimination of “discouraged workers” from official tallies of the workforce; the rise in disability recipients and prison populations who would have high unemployment rates were THEY counted in the labor force; the aging of the population (which should INCREASE employment rates).

And that didn’t count the rise in part-timers looking for full-time work. For the most extreme version of the argument that unemployment is much higher than reported, go here where contrarian economist John Williams paints a vivid picture.

That said, I don’t believe that “our subsistence (food, housing, clothing) is priced such that it now takes two workers to support a family.” Surely not food and clothing. Their costs have actually gone DOWN. As for housing costing more, yes, it’s been a factor, but housing costs are notoriously plunging as I write, and will presumably continue to do so as you read.

The work of Harvard law professor Elizabeth Warren, co-author of ‘The Two-Income Trap,’ makes it clear where the second income has largely been going: for housing, for health care, CHILD care (so both parents can work), an extra car or so per family (again, often, for commuting to work) and higher taxes, since two incomes are taxed at a higher rate than one.

Note, though, that apart from health care, all of these added costs are DUE to both parents working.

But as to your summary question – “could it be that a seven percent unemployment rate could actually have considerably more negative impact than say a 10-11 percent unemployment rate of a quarter century ago?” – I’d say the answer is an unequivocal “yes.”