The Great Depression was the hardest time for Americans in history. During the Depression, unemployment was estimated at around 25%. As hard as things are today, the BLS states the unemployment rate at 9.1%. Clearly, Americans want to take a little comfort in that.
Compared with the unemployment rate during the Great Depression, today's doesn't seem so bad. Yet, the truth is that these numbers are extremely misleading.
How is Unemployment Calculated?
The unemployment rate is commonly defined as the percentage of adults without jobs. That is a misconception. The unemployment rate calculations are a bit more complex.
The unemployment rate is the percentage of people in the workforce without jobs. The work force is defined as the people who either have work or are actively looking for work. This means that when someone stops looking for work, they are no longer a member of the workforce. Even though they don't have a job, they won't be counted as unemployed.
How Was Unemployment Different During the Great Depression?
The methodology for determining unemployment was set up by Stanley Lebergott, an economist with the Bureau of Labor Statistics. Lebergott defined the unemployment rate that we use today. However, there was one fundamental difference with Lebergott's methodology for calculating unemployment. Lebergott argued that anyone working on a government project should be counted as unemployed.
Lebergott's statement was criticized by other economists such as Michael Darby. Darby came up with his own estimates of the unemployment rate. Darby's unemployment estimates never exceeded 22.9% during the Depression. Those offered by Lebergott which were 24.9% in 1933.
The other major flaw with unemployment during the Great Depression was that it relied on surveys taken by state and local government agencies after the Depression already ended. The standards used by local governments were likely to differ.
Although Lebergott defined the labor force participation rate, the BLS did not start keeping track of it until 1948. The labor force participation rate may have been significantly different during the Depression. Also, keep in mind that women weren't expected to work during that time. It's impossible to know how that changes the results.
Clearly, unemployment wasn't figured quite the same in the Great Depression. How would this bias the results?
What is the Real Unemployment Rate Today?
The real unemployment rate is much higher than stated. The unemployment rate of 9.1% is meaningless, as it fails to take into account those who have stopped looking for work.
How significant are the people who stopped looking for work? The labor force participation rate is now the lowest its been since 1984. Millions of workers have given up looking for work.
A more meaningful measurement is the U-6 or underemployment rate. In addition to unemployed, this takes into consideration the number of people who are forced to work part-time against their will or are marginally attached to the workforce. The underemployment rate is over 16%.
The underemployment rate may also be an underestimate. The biggest problem with it is the way it factors in marginally attached workers. Marginally attached workers are those who have not looked for work within the past four weeks, but would take a job if one came up. They have attempted to look for work at some point in the prior 12 months.
In this economy, the percentage of long-term unemployed is higher than any time in history. The average unemployed American has been out of work for over 40 weeks. Many haven't worked in three years. How many people gave up looking for work over a year ago? They aren't included in the underemployment rate.
Today's unemployment numbers may not be as bad as those of the Great Depression, but they are much more complicated to determine. The real unemployment number is probably much closer to that of the Great Depression than we'd like to think.
Kalen Smith - Kalen has published his work on Young Entrepreneur, Young Pre Pro, Money Crashers, the Grasshopper Group and many other famous websites.
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