Unemployment and Income in a Recession

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Abstract

This brief, part of the Urban Institute's "Recession and Recover" series, assesses how unemployment and household income changes as the economy moves through a recession and into recovery.

Introduction

With many forecasting a long and deep recession, a look back at how individuals and families fared leading up to, during, and after the economic downturns of the past 35 years could help policymakers deal with the current economic crisis.

Dating the beginning and end of a recession requires taking many factors into account, but one hallmark that directly involves individuals and families is the unemployment rate—the share of the civilian noninstitutionalized population that wants work but cannot find it. The U.S. unemployment rate stood at 6.7 percent in November 2008 and is sure to climb in the coming months (U.S. Bureau of Labor Statistics 2008). Unemployment rates above 6 percent have been extremely rare since the economic expansion of the 1990s accelerated in 1995 (figure 1).1 Between 1995 and 2007, the annual unemployment rate was below 6 percent in every year except 2003. For the most part, workers under the age of 40 have spent their entire working lives in a relatively strong labor market.

But things were very different for older cohorts. Americans in their mid-50s spent the first half of their working lives negotiating some pretty tough labor markets. Consider the years between 1974 and 1994. The average unemployment rate topped 6 percent for 16 of those years and 7 percent for 11 of them. During the worst years, 1982 and 1983, the annual unemployment rate exceeded 9 percent. When it dropped to 7.5 percent in 1984, Americans celebrated the economic revival.

As figure 1 illustrates, unemployment rates begin to rise rapidly at the start of a recession. During the 1974–75 and 1980–82 recessions, the unemployment rate’s decline coincided with the end of the recession. But the downturns of 1990–91 and 2001 saw unemployment continue to climb even after the recessions ended, declining only a year or more after the economy had started growing again. It took about five years for the unemployment rate to drop below its pre-recession levels after the 1980–82 and 1990–91 recessions; the rate never returned to its pre-recession levels during the recoveries following the 1974–75 and 2001 recessions. Thus, even if the current recession ends in 2009, we may not see unemployment rates as low as 2007’s 4.6 percent for years to come.

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