2008, the financial sector crashes, and the economy -on which its weight was over
20%- falls with it. This period has been named by the economists -those who were able
to explain the catastrophe only after it happened- as the Great Recession.
The indicator which defines a given economic period as a recession (or as an
expansion), is the negative growth in real GDP during two consecutive quarters. On the
other hand, the indicator which really defines how recessions affect households income
(and therefore wealth) is the unemployment rate. Because of those two indicators,
economy is said to be recovered, as GDP growth is back to normal rates -those in 2006,
and so it is the unemployment rate.
What is the unemployment rate, and how is it calculated?
In this analysis, we take the unemployment rate as an approach to figure how the Great
Recession effects impacted and still impacts economy, and most importantly,
households. It is defined as the percentage of population in the labor force who can’t
find a job. It is calculated as follows:
* Labor force -population eligible for work, who are working or actively seeking for a job.
* Employed population -people who has a job.
Nevertheless, considering the unemployment itself as a sole indicator to evaluate the
labor market’s health may lead to misunderstanding. There are two other indicators
which definitely help having a better picture of it.
As the unemployment rate is calculated based on the labor force, and the labor force is
defined by the population who is actively working or seeking for a job, we should take
into consideration the population who simply does not want to work (or… does not want
or cannot work legally). This fact is captured by the labor force participation rate, which
is defined as -the proportion of the population who is actively participating in the labor
force. Healthy economies tend to have higher labor force participation rates as their
labor market are more attractive for population.
People may be employed, but in which conditions? Another important indicator to take
into consideration when analyzing a country’s labor market is the average weekly hours
of all employees. This indicator is as important as average wages when determining the
quality of the labor market, because it takes into consideration the proportion of
employed people who works part-time (non-desirable situation).
How the Great Recession affected the U.S. labour market.
Because of ‘Great’, all labour market indicators have been affected by the 2007/08
economic crisis. Because of ‘Recession’ the impact has been dramatically negative. In
this before and after Great Recession approach analysis, we analyze how negatively
this period has impacted the three major labor market indicators.
Before the Great Recession, indicators regarding employment in the U.S. were close to
optimal levels. With the unemployment rate rounding 4 percent (almost full employment)
and labor market participation reaching one of highest levels in history, only the overall
labor market was considered to be in good shape.
This fairy tale turned into a nightmare suddenly during 2008 and 2009. The
unemployment rate skyrocketed to 10% by the end of 2009 -considering that the labor
force participation rate also fell by 1% during the same period of time, the real effects of
the Great Recession were dramatical for the american labor market.
Taking a deeper look on the three indicators considered in this analysis, the situation
looks even more terrifying.
An unemployment rate of about 10% in the U.S. economy (the most liberalized
economy on earth) has dramatical consequences for population, as households are not
so protected by government as in other countries. Although many economists,
discussed whether this percentage was completely accurate -the argument is that
during such a negative economic period, unemerged economy tends to grow-, there is
no doubt that many households went bankrupt and had to change their lifestyle for a
much more humble one after 7.9 million people lost their jobs.
Those lucky enough to have a job, also were affected during this period. Consequence
of the tough competition among unemployed population for finding a job, wages
decreased sharply, and also did the average weekly hours of all employees. This
phenomenon is called distribution of work, and tends to happen during recession
periods.
For a better picture of the overall U.S. labor market attractiveness during the Great
Recession, it is necessary to observe the declining on the labor force participation rate.
In the scenario we are analyzing, the market became so negative that many people
abandoned the search of official jobs, and -most likely- switched to the unemerged
economy as a way to survive to the situation going on during this period.
Few months ago, we have reached unemployment rate levels similars to the ones prior
the recession (4.4% in December 2016). Nevertheless, we should still remain cautious
when claiming that economy has fully recovered -consider that unemployment rate is
nothing else but the portion of people who is willing to work, but cannot find a job. Being
true that there is less people who cannot find a job than during the Great Recession,
there are also less people who are willing to work -or at least to work legally-, what
helps unemployment rate remain on low levels.
Anyway, U.S. economy seems to be showing strong numbers YoY and recovery seems
to keep on track, but is still being too early to understand the economy in terms of
employment as it was a decade ago.
Durable Goods vs. Real GDP –
What features do you observe – Starting in 1999, durable goods were directly correlated with real GDP.
When GDP increased, durable goods did as well and vice versa. This indicates that the durable goods
indicator is a direct reflection of how the economy is doing. When we are in bad economic times, less
durable goods are purchased. We see this exact trend during the 2008 recession when there is a large
dip in the real GDP as well as durable goods. During time of recession, consumer confidence is down,
unemployment is up, and people are not purchasing goods other than necessary goods. When durable
goods are increased, it is a sign of a flourishing economy which is reflected by a high GDP. Durable goods
follow the economic cycle in that when durable goods are up, real GDP is up and vice versa. Durable
goods actually leads to an increased GDP so the two are directly correlated.
Nondurable Goods vs. Real GDP –
The graph implies that nondurable goods, while they follow the trend of real GDP, they do not react as
drastically as the peaks and dips of real GDP. This indicates the need for nondurable goods. Even during
times of recession, people may not spend as much on things such as groceries but they still need to
purchase them to live. Therefore, during time of recession, you will see a decline of nondurable goods
but not as drastically as a decline in real GDP.
Services vs. Real GDP –
This portion of consumption is least affected by economic events that would affect real GDP. While real
GDP takes drastic peaks and falls throughout the life of the graph, services remain fairly steady. This is
due to the fact that services are not necessarily luxury items but are usually necessary for daily living.
Additionally, services can be long term commitments and not as easily abandoned or switched for
alternatives.
Conclusion –
Durable goods are most drastically affected by economic changes (most volatile) although it does
drastically drop as the recession hits in 2008. We expect to see this trend as durable goods have the
most alternatives while services are limited and usually more long-term. Essentially all three indicators
make up consumption. It is evident that consumption is going to be affected by how the economy is
doing. If we are in an economic recession, we expect consumption to decline. It will never fully get to
the point of zero consumption as there are basic necessities, but certain indicators are more affected by
economic conditions than others as shown in the graph. These patterns are important for firms because
the indicators show the level of consumer confidence. It tells firms if they should promote growth in
production and labor force versus a time of recession when firms may downsize. Economic conditions
also imply what people will be buying. For example, during times of recession, women tend to purchase
more beauty products (durable goods). To a firm, this is a determinate of what consumers will be
purchasing during certain economic times.
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