The unemployment number we should really watch

IF IMF estimates are accurate, this will be the first time since the Great Depression that both advanced and emerging economies could be in recession. The potential of unemployment rising to double digits is also reminiscent of the depression of the 1930s.

Some of the great economic ideas of our time were forged in the experience of that previous economic collapse, notably through John Maynard Keynes and Milton Friedman.

So it’s little surprise that most governments have focused on the lessons the major economists took from that experience - such as extending liquidity to help the financial system (Friedman) and fiscal stimulus to keep the economy going (Keynes).

Unfortunately, we are in danger of ignoring the important work of a less heralded mind to come out of this period, Joan Robinson.

Robinson was a disciple of Keynes; her work focused on the importance of state intervention to support employment.

She identified “disguised” or “hidden” unemployment in the 1930s, when workers took on any work they could and thus were not officially considered unemployed.

When workers are laid off, Robinson argued, people would take any job in order to survive even if that meant selling matches on street corners.

Although these workers are technically employed, such employment was really disguised unemployment, which meant the official unemployment rate was not telling the whole story. The matchstick seller on the street corner that she wrote about was the early 20th century equivalent of the gig economy worker today.

Due to Robinson’s pioneering work, the US measures not only the number of people who are officially unemployed, but also those who want and are available for full-time employment but have had to accept part-time work.

Along with those who are available for work but not seeking employment or otherwise discouraged, this broader measure (known as the U6 rate) captures more fully the unemployment picture.

As of March, this measure was already 8.7%. The impact of Covid-19 was only beginning at this point and yet it is about double the official March unemployment rate of 4.4%. This was also the case in the 2008 global financial crisis, which saw the U-6 rate at twice the level of the official unemployment rate and then come down as the labor market recovered.

Robinson would tell us we need to broaden the way we think of the self-employed too, which can range from gig economy workers to wealthy business owners, and ensure that relief targets the hidden unemployed.

The job retention or furlough schemes of a number of countries including Denmark, the UK, the US as well as the short-time work schemes of Germany, France, Italy, among others, all help to keep employees attached to their employers by subsidising firms that would otherwise lay off workers.

The established and profitable self-employed are covered to some extent by various programs.

But these measures often fail to extend coverage to people who fall into the category of the hidden unemployed. A self-employed contractor with minimal profits or who pays himself or herself dividends instead of a salary to fund their start-up is largely omitted from these schemes. One-off stimulus checks - such as the US$1,200 given in the US - might not be sufficient given the scale of the economic downturn.

Since entrepreneurs are also often innovators, there are long-term costs to leaving this segment of the workforce unsupported.

Just as in the 1930s, the gig economy workers of today are the ones most likely to fall through the cracks and leave the economy scarred by reducing its potential workforce and therefore its potential economic growth rate.

Coming up with innovative schemes to help these workers is challenging but necessary. In Robinson’s era, the creation of the social safety net to catch those who fell through the cracks was part of the solution.

The modern equivalent may well be more substantive universal basic income, or UBI, universal credit or even universal health care to strengthen the existing safety net.

The kind of support would depend on the existing benefits system, but an ongoing UBI, to continue throughout the pandemic rather than a one-off, would help in most countries as that means a check would put money each month into households’ bank accounts below a certain income level. The concerns that are often raised about affordability or moral hazard aren’t as relevant during a crisis.

Robinson’s insights challenge us to find a new social contract with workers. They won’t be easy to implement, but they offer a better path for returning to growth. The history of the Great Depression tells us it will take more than the usual policies. — Bloomberg Opinion

Linda Yueh is an economist and author of “The Great Economists: How Their Ideas Can Help Us Today.”