At this point it seems quite possible that the US unemployment rate will eclipse the Great Depression’s jobless rate of 24.9 percent as a result of nationwide shutdowns in response to the coronavirus. Despite the astonishing turn in the economy, however, we should take FDR’s advice and realize that fear itself is the greatest threat to our future—the economy is not facing the deep structural imbalances that led to the Great Depression. And despite the scale of the bad news we’re getting on a daily basis, the recovery will likely be swift; it won’t take a decade to climb out of this economic hole.
Last week’s initial unemployment insurance claims came close to setting a new record for the third week in a row. While not surprising, given that the previous week saw 6.9 million people file for unemployment insurance, yesterday’s Department of Labor report of 6.6 million new claims from March 26 through April 2 is still extraordinary. We’ve never seen joblessness rise so fast in the US.
A preliminary estimate of the national unemployment rate at the end of last week would be around 15 percent. This assumes that the number of people who have been hired since the March establishment jobs survey isn’t greater than the number of people who are newly unemployed and haven’t filed for unemployment insurance. For comparison, unemployment during the Great Recession peaked at 10 percent.
The last data on the number of new hires is from February, 5.9 million, but that brisk hiring trend has likely declined as businesses have had to lay off or furlough their existing workers. Evidence of this is seen in the stark drop in online job postings just days after the initial state-level economic shutdown orders began. After the coronavirus hit China and Italy, the hiring rate dropped by over 40 percent compared with a year earlier.
Pennsylvania may serve as a bellwether for where the US as a whole may be going, since the state was an early adopter of stay-at-home orders and reports its unemployment claims filings daily. Its claims reached a peak around March 23rd, and while daily reports are still elevated, they have mostly declined since then. This suggests that we may see a similar decline nationally next week.
However, if the sudden surge in unemployment claims has overwhelmed state agencies and bottlenecked the processing of applications, then we may see similar levels of claims for the next few weeks as the backlog clears. One reason to believe this may be the case is that the number of actual (i.e.: non-seasonally adjusted) initial claims filed over the last two weeks was similar, 6.0 and 6.2 million. Given that some states and localities were relatively late to order community shutdowns, it’s reasonable to expect that more workers should have filed for unemployment during the week of March 29. Furthermore, the federal bonus to state unemployment insurance, which was part of the CARES Act (enacted March 27) makes filing for unemployment insurance more lucrative. This also suggests that filings should have increased the week of March 29.
Following a similar methodology as before, I estimate Pennsylvania’s unemployment rate as of April 9th (the date of the most recently available data) to be around 24 percent. The surge in unemployment claims isn’t over yet, though. And it’s important to note that independent contractors, who are newly eligible for state unemployment insurance through the CARES Act, must wait to file until state systems can be reconfigured to accept their claims.
In other words, even if Pennsylvania does offer a good example of where the US as a whole is going, we should expect the national unemployment rate to approach the peak unemployment rate experienced during the Great Depression.
However, the Great Depression was caused by deep structural economic imbalances and exacerbated by harmful government responses. In other words, it was created by problems inside the economy. The coronavirus, in comparison, is an external shock that, while harmful, doesn’t necessarily indicate problems in the underlying economic structure.
In short, the recession we’re diving into is a conscious tradeoff to avoid a public health crisis caused by the uncontrolled spread of COVID-19. We’ll likely need more economic relief from the federal government—essentially borrowing money from future taxpayers. But with effective policies to mitigate the unintended consequences of social distancing, there’s reason to be hopeful that the recovery will be relatively swift.