No Such Thing as a Free Lunch: Principles of Economics (Part 104)

It's a recession when your neighbor loses his job; it's a depression when you lose yours.

Harry S. Truman

Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

(Part B)

by

Charles Lamson

Recessions, Depressions, and Unemployment

We now move from considering long-run trends in the last post to considering deviations of the economy from long-run trends. In other words, we consider business cycles, the periodic ups and downs in the economy.

A recession is roughly a period in which real GDP declines for at least two consecutive quarters. Also recall that real GDP is a measure of the actual output of goods and services in the economy during a given period. When real GDP falls, less is being produced. When less output is produced, fewer inputs are used, employment declines, unemployment rate rises, and a smaller percentage of the capital stock at our disposal is utilized (more plants and equipment are running at less than full capacity). When real output falls, real income declines.

A depression is a prolonged and deep recession, although there is disagreement over how severe and how prolonged a recession must be to be called a depression. Nearly everyone agrees the U.S. economy experienced a depression between 1929 and the late 1930s. The most severe recession since the 1930s took place between 1980 and 1982.

Since 1970 there have been four "recessionary" periods in the U.S., 1974-1975, 1980-1982, 1990-1991, and 2001. Table 1 summarizes some of the differences between the recession of 1980-1982 and the early part of the Great Depression. Between 1929 and 1933, real GDP declined by 26.6 percent. In other words, in 1933 the United States produced 26.6 percent less than in 1929. While only 3.2 percent of the labor force was unemployed in 1929, 25.2 percent was unemployed in 1933. By contrast, between 1980 and 1982 real GDP was essentially unchanged rather than declining. The unemployment rate rose from 5.8 percent in 1979 to 9.7 percent in 1980. Capacity utilization rates, which show the percentage of factory capacity being used in production, are not available for the 1930s, so we have no point of comparison. However, Table 1 shows that capacity utilization fell from 85.2 percent in 1979 to 72.1 percent in 1982. Although the recession in the early 1980s was severe, it did not come close to the severity of the Great Depression.

TABLE 1

Defining and Measuring Unemployment

The most frequently discussed symptom of a recession is unemployment. In September of 1982, the United States unemployment rate was over 10 percent for the first time since the 1930s. Although unemployment is widely discussed, most people are unaware of what unemployment statistics mean or how they are derived. 

The unemployment statistics released to the press on the first Friday of each month are based on a survey of households conducted by the Bureau of Labor Statistics (BLS), a branch of the Department of Labor. Each month the BLS draws a sample of 65,000 households and completes interviews with all but 2,500 of them. Each interviewed household answers questions concerning the work activity of household members 16 years of age or older during the calendar week that contains the twelfth of the month. (The survey is conducted in the week that follows the week that contains the twelfth of the month.)

If a household member 16 years of age or older worked 1 hour or more as a paid employee, either for someone else or in his own business or farm, he is classified as employed. A household member is also considered employed if he worked 15 hours or more without pay in a family enterprise. Finally, a household member is counted as employed if she held a job from which she was temporarily absent due to illness, bad weather, vacation, labor-management disputes, or personal reasons, whether she was paid or not.

Those who are not employed fall into one of two categories, (1) unemployed or (2) not in the labor force. To be considered unemployed, a person must be available for work and have made specific efforts to find work during the previous four weeks. A person not looking for work, either because he or she does not want a job or has given up looking, is classified as not in the labor force. People not in the labor force include full-time students, retirees, individuals in institutions, and those staying home to take care of children or elderly parents.

The total labor force in the economy is the number of people employed plus the number of people unemployed:

Labor force = employed + unemployed

The total population 16 years of age or older is equal to the number of people in the labor force plus the number not in the labor force:

Population = labor force + not in labor force

With these numbers, several ratios can be calculated. The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force:

Unemployment rate = unemployed / employed + unemployed

In April 2021, the unemployment rate was 6.1 percent.

The ratio of the labor force to the population 16 years old or over is called the labor-force participation rate:

Labor force participation rate = labor force / population

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 414-415*

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