RECESSION AND UNEMPLOYMENT:

A RETROSPECTIVE ANALYSIS OF THE ECONOMIC WELFARE LOSS

by Dorothy M. Smith*

In the Classical tradition, most economists until the 1930's and the Great Depression felt the competitive private enterprise economy would automatically equate aggregate supply and demand at the appropriate level. Economic fluctuations and the resulting unemployment were considered either the inevitable consequences of an expanding economy or the results of government intervention in the marketplace. These views implied the government should pursue a laissez-faire policy in the economic sphere. The economic collapse of the 1930's dramatically altered American attitudes with respect to public policy to combat persistent unemployment. Twenty-five (25) percent of the American labor force was unemployed at the trough of the depression, and throughout the decade of the 1930s the unemployment rate did not fall below fourteen (14) percent. According to Dr. Arthur M. Okun, "with the sole exception of the Civil War, no episode in our nation's history has so strained the fabric of American society." (19,vii).

The refusal of the American public to accept the economic conditions of the depression as inevitable or due primarily to the errors of the government produced a great hue and cry for action. The response of the government culminated in the social programs collectively known as the New Deal. "At the theoretical level, John Maynard Keynes dealt a mortal blow to Say's Law, the doctrine that supply creates it own demand, and thereby destroyed the logical foundation for faith in the basic stability of the private economy" (19,vii). The New Deal marked the beginning or overt government intervention in the economy with the aim of combating persistent unemployment.

Since the late 1960s Keynesian economics has been harshly criticized for having precipitated rampant inflation. Obviously, the Monetarist revolution, a counter to Keynesian economics, has been relatively successful in shifting the focus from fiscal stabilization to monetary policy. The adoption of a monetary growth rule by the Federal Reserve signaled the shift from targeting the interest rate to controlling the growth of the nominal money supply. Policy changes of this type are apt to generate some problems as the old way of doing things is replaced by a new method. While interest rates have soared to lofty heights, the shift in policy target has been relatively effective in lowering the rate of inflation. However, this success on the inflation front has been costly in terms of output and employment. As the current recession deepens, it becomes increasingly apparent that the problem of employment must be addressed.

This paper examines the unemployment with special emphasis on past recessions and the pattern of unemployment, which exists in the United States. Stabilization policy recommendations emanating from the Monetarist framework appear inadequate for addressing the problem posed by the pattern of unemployment. In general, Monetarists assume the unemployment problem will dissipate as the aggregate economy improves. While this assumption may be theoretically sound in the case of the overall unemployment rate, there is no reason to believe this will be the case for the pattern of unemployment. Solving this problem will require more than what has been put forth thus far by Monetarists and numerous Keynesian economists as well.

Monetarists may be able to argue effectively that society has a perfect right to fight inflation by increasing unemployment or by maintaining existing high levels, but society does not have the right to distribute the burden of its battle unequally. In this regard, the Monetarist framework does not adequately treat questions of equity and justice. Yet, the most important virtue of any society is social justice, which necessitates an equitable distribution of burdens and benefits. However, it should be stressed that the burden of unemployment has been historically concentrated among American youths and racial minorities. Because the burden of unemployment has not be equally distributed in the past, questions of equity and justice raised in the present recession cannot continue to be ignored by our society. Should past and current patterns of unemployment persist, the burden of higher unemployment during this recession will fall disproportionately on those at the lower socioeconomic level. This pattern of unemployment has been and continues to be America's most important domestic problem. In fact, the pattern may be more important than the absolute level of unemployment (4,22). It shall be argued, then, that the distribution of the social cost of unemployment is functionally related to the pattern of unemployment. Furthermore, as an economic strategy, recessions induced to cure inflation redistributes incomes in a fashion void of equity and justice. Any society, which chooses to concentrate its unemployment among its young and racial minorities, inevitably pays a far higher price in terms of socioeconomic and political woes than does a society in which unemployment is balanced. That is, the economic welfare loss attending unemployment and recession is fairly distributed.

First of all, it is important that one understands the relationship between the level of employment and economic welfare. Table I provides annual national income figures, employees' compensation and employees' compensation, as a percentage of national income for selective years from 1940-1979 (4,20). With employees' compensation making up over three-quarters of total national income, it stands to reason that employment is a principle contributor to national economic welfare." (4,22). If the social goal is to generate maximum economic welfare, then full employment is essential to its attainment. The important question of a definition of full employment is another crucial area, which continues to produce considerable controversy. While there is no answer on which everyone will agree, I intuitively accept the definition of full employment is that level at which the unemployment rate equals the vacancy rate or alternatively full employment means the absence of involuntary unemployment. While this by no means resolves the controversy, society's attainment of maximum economic welfare necessitates a fully employed economy.

Second, the integral relationship between the level of employment and economic welfare necessitates an understanding of the welfare loss caused by recessionary economic policies. Unemployment and recession create circumstances in which some of the American people are unable to share in the fruits of whatever level of economic welfare enjoyed by the nation as a whole. The loss in income for the unemployed translates into a curtailment or elimination of their economic freedom and security. Unemployment statistics do not convey a realistic picture of the problem. More importantly, unemployment figures obscure the impact of this condition on the jobless, because there are no measures to quantify the disappointments, the shattered dreams, the dashed hopes, or the depths of despair of the unemployed. In this regard, unemployment is a human problem with far reaching consequences for the entire nation, because the unemployed must survive. It is accepted that increases in the unemployment rate means the welfare rolls will grow correspondingly. Further, it is believed many of those who do not meet the qualification guidelines for assistance are pushed into criminal activity to secure their livelihood. Inevitably, the human cost not measured in dollars and cents, increased welfare rolls, increased outlays for law enforcement, incarceration of criminals, etc., are the costs society must pay for maintaining high levels of unemployment.

Third, this approach takes a dim view of the conventional economic approach to unemployment. That approach focuses primarily on the average national unemployment rate, a questionable statistic at best, because of the manner in which the data is collected, and who is and is not included in it. The conventional unemployment statistic, according to research in this area, distorts the demographic incidence of job losses and understates the impact of recession on minority and youth employment opportunity (22). Although the conventional unemployment data is conservative, and thus open to criticism, it will suffice in examining the issue raised here. However, to capture the essence of the unemployment data, one must examine it along demographic lines. Once the pattern of unemployment is outlined, the probable distribution of the social costs of this recession can be discerned.

If the pattern of unemployment was such that the burden fell evenly among the various socioeconomic and racial groups, then the recession we are currently experiencing will cause equal hardships to be borne by all groups. The income loss and thus the loss in economic welfare will be equitably distributed, rendering questions of justice and equity unnecessary or moot. However, this has not been the case historically in the United States. "Unemployment does not fall uniformly upon everyone, nor does it strike randomly at our labor force,...it is directional and selective; it strikes from underneath, and it strikes particularly at those at the bottom of our society" (19,1).

Table II provides data on unemployment rates by demographic characteristics during the past five recession and more recent years. When the national average unemployment rate is five (5) percent, in our ghettos and other hardcore areas unemployment rates are in the double digits. Among certain groups, as the data indicates, this relatively low national level of unemployment translates into unemployment rates in excess of thirty (30) percent. Over the past few years, unemployment among teenagers has averaged five (5) times the rate for the civilian labor force over twenty-five (25) years of age; youths between 20 and 24 have experienced unemployment rates which averaged 2.5 times that of the general civilian labor force. While youths between 16 and 24 account for 25 percent or 22 million of the civilian labor force, they represent 50 percent of the aggregate unemployment. These statistics dramatically illustrate the employment hardship of the young; "the youth sector of the labor market experiences the highest rate of unemployment which, even in the best of times, stays at a rate often three and one-half times that of the labor force as a whole" (29,3). The labor market experience of youths in past recessions, as well as good times, has varied by demographic group, location and other circumstances. Black youths have historically confronted conditions in the labor market that as far worse than those confronting their white counterparts.

In microcosm, the black youth unemployment problem reflects the problem of unemployment confronting minorities for the nation as a whole. The disparities that exist between black and white youths also exist between black and white adults. The white adult male has historically enjoyed the lowest level of unemployment, whatever the overall economic condition. In the most recent past recessions, the white adult male unemployment rate tended to be lower than the rate for the entire labor force. White adult females enjoyed unemployment rates during the past recessions similar to white adult males; at worst, the white-adult female unemployment rate equaled the national average. In this regard, white adults, as a socioeconomic class, have generally fared better than others during past recessions. This is especially true relative to the socioeconomic class identified as minorities. The date collected for this class, blacks and other minorities, during the past recessions show an unemployment pattern among adults and teenagers similar to that among whites. But, the overall pattern for minorities in relationship to the national level is decidedly different. During good and bad times, the minority unemployment rate averaged 2.1 times that of whites, placing minority unemployment well above the rate for the labor force as a whole (26,61).

Table III shows the unemployment rates for minorities and whites and the ratio of minority to white unemployment for selective years from 1948 to 1981 (26, 69). To estimate the functional relationship that has historically existed between minority and white unemployment, the least squares regression technique generated an equation consistent with the assertion that minorities bear a disproportionate share of aggregate unemployment. Equation 1.1 in Table V provides the statistics relevant to this analysis. This equation predicts extremely well the movement of minority unemployment overtime in response to changes in white unemployment. The empirical evidence indicates that throughout this period minorities have made up a disproportionate share of the overall unemployment. Should this pattern continues as the national average unemployment rate during the current recession rises, minority unemployment can be forecasted employing this regression equation. Assuming the overall unemployment rate at the bottom of the recession reaches 10 percent, and the white adult unemployment rate reaches this level, minority and youth unemployment can be estimated.

On the basis of the regression analysis with a standard error of .8987, minority unemployment can be predicted with 99 percent confidence to lie on the interval .339616 + 19.48252 ± 2.31528304 or 21.458 to 22.137 percent. Because youth unemployment has traditionally ranged between 2.5 to 5 times the national average, a range of unemployment for this sector of the labor market can be projected. Given a national average unemployment rate of 10 percent for the depth of the recession, youth unemployment will lie on the interval 25 to 50 percent. Although this interval appears excessively high, it is consistent with the data, because some sectors of the youth labor market have already attained such heights. Thus, it would appear that "increased unemployment means, not only more people out of work, it means more black people, young people and more poor people out of work" (19,2).

The fact that the burden of unemployment is concentrated among the young and minorities would seem to indicate that these groups would bear a disproportionate share of the social cost of still higher unemployment. Because of the important relationship between employment and income, youths and minorities will absorb a larger share of the economic welfare loss experienced by the nation as a whole. This would make the pattern of unemployment an important factor in determining the distribution of income, and helps to explain the income disparities that exist among different socioeconomic classes.

At this juncture, it should be noted that income differences between minorities and whites are related to a number of factors including racial differences in unemployment, work experience, educational attainment, occupation, age, region of residence and discrimination (8, xii). All the studies, reports and research data published by the government and in the private sector conclude that substantial differences between the incomes of white and black Americans exist. And, while the focus here is primarily on income disparities between black and white families, "income differences exist for both families and individuals" (8, xv). The income differences for nonwhites and whites display a pattern similar to that of families except the differences are more pronounced (8,6).

Some will choose to dismiss racial discrimination as a relevant factor in determining the pattern of unemployment and income distribution, and take refuge by perpetuating the myth that blacks and other minorities are lazy, irresponsible products of an inferior subculture, and do not want to work. This myth, a normative judgement, is just one symptom of the general problem of racial discrimination, which can be most clearly focused on by reviewing the history and present circumstances of black American life. Such a review "gives meaning to the assertion that we are a racist society, a racism that is intimately bound up with work and productivity and individual worth" 19, 5). This is a dubious myth because in the midst of the highest level of opulence ever achieved by any society minorities perform the most menial and dullest tasks, they are the poorest paid, and some do not work at all. However, most minorities do work, so for them it is a question of pay. For example, in 1966 one-quarter of all non-white full-time, year round male workers earned less that $3,000 in a year in which the Bureau of Labor Statistics estimated it required $9,200 a year for a family of four in an urban area to maintain a modest standard of living (19,6). And, although educational attainment is a factor in the income disparities between minorities and whites, "incomes to black males at all schooling levels tend to be lower than incomes to white males. White males who were high school graduates had a median income in 1975 only $100 lower than black males who were college graduates" (8, xvi).

After accounting for the quantifiable factors, "the existence of discrimination and its influences on income differences are clear, yet the measurement of its influence is elusive" (8, xix). While it is not possible to measure the influence of discrimination directly, the essence of its influence can be captured by examining the difference in median family incomes and unemployment rates. On the basis of the least squares regression technique, equation 1.3 in Table V indicates that approximately 47% of the differences in income between minority and white families is explained by differences in unemployment, which is intricately bound up in the institutionalized racism that is so much a part of minority American life. The overall socioeconomic and political condition of black American life blatantly suggests that this deep-rooted problem with its ethical considerations has played a formidable role. Ironically, in times of peace blacks are, in general, the last hired and the first fired. Yet, in times of war, black men have been the most likely to be drafted and accorded the dubious distinction of being principle candidates for frontline duty in the defense of American values and interests. Blacks are more likely to reside in low-income neighborhoods, attend 'inferior' inner-city schools where they receive inferior education. Because of the redlining practices employed by the financial community and their influence on real estate values, blacks are more likely than whites to live in dilapidated areas doomed to deterioration. Racial discrimination seems to be the primary reason why blacks have been systematically relegated to the bottom of the socioeconomic ladder, and the reason why black human capital in American is valued at approximately ½ of white human capital. This assertion is consistent with the regression equation 1.2 in Table V, which was generated using the data series in Table IV.

Table IV shows the median family incomes for minorities and whites from 1947 to 1980. At the beginning of this data series in 1947, the median income ratio of minority to white families stood at 51%; the ration inched upward with some fluctuations during the 1947 to 1953 period registering 56% in 1953. The economy experienced a recession in 1953-54; afterwards, a general downward movement in the ratio was evident. By 1958, the ratio had fallen to 51%, the same as in 1947. The median family income ratio increased from its 51% level in 1958 to 54% in 1959 following the 1957-58 recession. Unfortunately, the 1960's began with a recession, which lasted through 1961. This decade was noticeably marked by social unrest; riots erupted in many areas across the country (26, 25). Although the ratio of minority to white family income rose ten percentage points during the decade from 53% in 1961 to 63% in 1969, minority economic progress stalled and became undone thanks to the lackluster aggregate economic performance of the 1970's. The minority to white family median income fluctuated during the 1970's; it declined 5.9 percentage points over the decade from 63% in 1969 to57.1% (11, 6). The first two years of the 1980's have brought about no change in the downturn in the ratio. Thus, there has been negative economic growth for minorities in the 1970 and early 1980's making "conditions for minority Americans today substantially worse than those at the height of the civil unrest of the 1960's (11, 17).

As the data indicates, an inverse relationship exists between the unemployment and median family income ratios of minority and white Americans. As the minority to white unemployment ratio declined, signaling labor markets for white human capital are tight and the economy is on an upswing, minority to white family median income increased. However, the minority unemployment rate over the past thirty-three (33) year period from 1948-1981 averaged 2.1 times that of whites, and the minority to white median income ratio fluctuated between the narrow band of .5 to .65. Thus, even when the overall economy experiences an upswing, i.e., increasing output and employment, minorities continue to have usually high rates of unemployment and low incomes relative to whites. From all indications, the economic recovery promised by the current administration will do little to alter the pattern of unemployment for American youths and minorities.

Full employment would require a high level of aggregate demand; in fact, it would have to be excessively high under current circumstances to significantly lower youth and minority unemployment rates. In our current economic environment, aggregate demand policy is likely to prove to be inflationary. The statistical data presented overwhelmingly suggest that such a prescription alone is unlikely to affect these segments of the labor force; they will continue to experience rates of unemployment well above the national average. Thus, monetary and fiscal policies to stimulate aggregate demand will have no substantial impact on the problem of the pattern of unemployment. Permanently altering the pattern of unemployment would require a huge infusion of investment that is not likely to be forthcoming from the private sector. Nor is the private sector apt to offer newly created jobs to inexperienced, unskilled and semi-skilled youths and minorities. The government is the only source available through which an effective effort can be made and remedial policies instituted to alleviate or mitigate the problems posed by the pattern of unemployment.

This pattern of unemployment has existed for a long time, and its longevity appears certain to continue over the current recession influencing the distribution of income as usual. In all likelihood, the burden will be borne disproportionately by minorities and youths. Unless some remedial measures are undertaken to dampen the negative impact of the recession on these groups, and to some extent the American middle class, the questions of equity and justice will have to be addressed. An alternative approach, vis-a-vis high unemployment as a cure for inflation, is available. Lowering the unemployment rate in an inflationary environment can be accomplished through several measures or steps taken simultaneously to dampen inflation and increase employment in the short run, while in the longer run, comprehensive economic planning will be necessary to permanently alter the pattern of unemployment and mitigate the debilitating effects of chronic inflation.

By instituting a wage and price freeze, which should cover interest, salaries and wages, rents, profits, etc., inflationary expectations can be dampened, if the controls remain on long enough. Arguments against such a measure are based on the consequences of the limited freeze imposed during the Nixon administration. Despite these objections, a freeze can operate to dampen inflationary expectations. The entire argument boils down to society having a choice between two undesirable measures to abate the rate of inflation: recession and high unemployment or a freeze on wages and prices. Normatively, the economic welfare loss and the unequal distribution of social costs of a recession and high unemployment under current circumstances make the freeze the more just option. Neither simply lapsing into a recession, nor imposing a freeze will be sufficient to solve any of our more pressing domestic economic problems, i.e., the pattern of unemployment, inflation and energy costs.

Although the problem of energy has not been addressed up to this point, it looms very large as a socioeconomic and political problem for Americans. It, like the problem of unemployment, will require innovation and willingness on the part of the American people to adapt to a changing environment. Had the Reagan administration retained the Carter windfall profits tax, substantial revenues over the next few years would have been generated. Under the auspices of a freeze, the government could have provided tax incentives, subsidies and/or whatever additional investment necessary to exploit the enormous potential of solar energy. Programs funded by the tax revenue could have included some or all of the following: (1) federal and private investment in research and development of alternative energy sources, (2) the establishment of a conservation- preservation corps in which private homes and commercial buildings could be insulated, converted to solar units for heating, and (3) a number of other projects geared toward conserving energy, preserving existing structures and preparing the way for an American solar future. America's dependence on foreign insecure energy sources makes the economy all too vulnerable to supply shocks emanating abroad. Reducing America's dependence on foreign oil will give this nation greater freedom to act and react in the international arena. In this regard, exploiting the solar field could sever America's umbilical cord from the Persian Gulf, while keeping America ahead in technology and allowing us to have a more fully employed economy. In addition, the solar revolution could in the long run lower the cost of energy. But, more importantly, this will employ many who are currently idle, unproductive and a source of drag on the economy.

Some will argue that this is more kindle for the inflation fire, and I agree, if handled improperly, it will be inflationary. The Reagan administration's budget is an inflationary document itself; I am inclined to believe the prospects for cooling inflation even with a balanced budget are not very good over the long run. As it stands, Reagan's austere budget with a projected $100 billion deficit for 1983 will have an inflationary impact on some segments of the skilled labor market and the private sector, especially the military-industrial component of the budget; nothing could be more inflationary. Thus, it is a simple matter of how society ranks its priorities and how far down that list changing the pattern of unemployment falls. Apparently from the proposed and actual cuts in social programs this priority ranks very low indeed.

Beyond controls to abate inflation and the creation of an environment wherein efforts to alter the pattern of unemployment may be successful, long term economic planning and the institutionalization of policies in recognition of the non-competitive structure of the economy will be necessary. This will be no small task, as many roadblocks must be removed; but a fundamental change will be required in the structure of the American economy to solve this nation's socioeconomic and political problems. In retrospect, governmental intervention in the private economy to alleviate the problems confronting the poor, young, old and disabled is not the culprit in the inflation picture. Rather, the government's relationship with big business and the structure of the economy are the real culprits.

However we elect to approach the problem examined here, whether a trickle down or comprehensive economic planning, America's response to the questions of equity and justice will be crucial to this nation's domestic peace and stability. As history illustrates, a nation that attempts to ignore such questions condemns itself to pay a higher price in the long run. Social injustice breeds crime, corruption and moral turpitude; no society is immune to its degenerative influence and the exorbitant social costs it imposes. The current recession, given the historic pattern of unemployment poses a question of not simply how much more unemployment we can stand, but whether we can stand, through deepening unemployment, a deepening of the race and class divisions that are already threatening to tear our society apart. The 20^th century has already shown how a whole society beset by recession and unemployment can develop the ugliest mass emotions, including the ancient curse of anti-Semitism, as well as other prejudices, which thrive on economic disaster. America's international image and credibility hangs in the balance too, because others' perception of us will be influenced by the manner in which we choose to resolve our domestic problems. Our ability to appear cohesive to the rest of the world hinges in part on how accessible the American economic pie appears to be for American youths and minorities. Thus, the shameful manner in which these groups have been treated will become a serious liability in American domestic and international relations should patterns of unemployment persist and dominate the 1980's as they did the 1970's. The questions of equity and justice cannot be ignored for very long; they must be openly addressed.

TABLE I. NATIONAL INCOME AND EMPLOYEES' COMPENSATION

 TABLE II. DEMOGRAPHIC UNEMPLOYMENT RATES

(Notes on symbols for Table II: MW, male whites; MWT, male white teenagers; FW, female whites; FWT, female white teenagers; MW, minority males; MMT, minority male teenagers; FM, female minority; FMT, female minority teenagers)

TABLE III. MINORITY AND WHITE UNEMPLOYMENT RATES

 TABLE V. LEAST SQUARES REGRESSION EQUATIONS

Notes: Equations

(1.1) Minority unemployment = f (white unemployment)

(1.2) Minority Family Median Income = f (white family median income)

(1.3) Minority-White income difference = f (minority-white unemployment differences)

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22. Smith, R.E., "The Teenage Unemployment Problem - How Much Will Macro Policies Matter?" Report of Congressional Budget Office Conference on the Teenage Unemployment Problem: What Are the Options? (Washington, D.C.: U.S. Government Printing Office), October 14, 1976.

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• Written in 1982 when Dot Smith was a graduate research assistant at Memphis State University. Published Mid-South Journal of Economics1982

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