Back in February of this year, the unemployment rate in the United States was 3.5 percent: the lowest rate since 1969, said Pugh Family Professor of Economics David Findlay, now in his 35th year teaching macroeconomics. But just a month later, unemployment claims had increased by 30 million, and the unemployment rate skyrocketed to 14.7 percent. The historic increase in the unemployment rate in such a short period of time, said Findlay, is “unprecedented.”
Even measuring unemployment during a health crisis such as this one has proved to be difficult. Said Michael Donihue ’79, Colby’s Herbert E. Wadsworth Professor of Economics: “In order to qualify for unemployment you have to be looking for a job, and since we have stay-in-place orders and a lot of firms are shut down, it’s hard to even look for a job.” To make matters worse, said Assistant Professor of Economics Lindsey Novak, who specializes in health economics: “In the U.S., jobs are tied to health insurance. When we’re thinking about people losing their job in a health crisis, that is really scary.”
To complicate matters even more, unemployment benefits are given to those in need to fall back on, but also “to discourage workers from going back into the workforce” amid the pandemics, said Robert Lester, Colby assistant professor of economics. Indeed, the official unemployment rate understates the damage.
“In a lot of ways, Colby grads are going to be well-suited due to their liberal arts background and their tenacity, their ability to pivot.” —Professor of Economics Michael Donihue
Findlay points to the U-6 measure of unemployment as the number to look at. The U-6 unemployment rate is a broader measure that captures individuals who have stopped searching for jobs as well as those who work part time who would prefer to work full time. “That measure of unemployment is going to increase significantly in the next reporting period because it captures some of the stuff the official unemployment rate statistic does not,” Findlay said.
It is clear that the nation is in a devastating period of depressed economic activity. But as Lester reminds us, “It is an efficient recession in the sense that you want people working less because of the susceptibility to get the virus and give it to someone else.” In the years following the economic crises in 1929 and 2008, “all the policies were designed to get people working more.” Obviously, policies in place in 2020 are designed to do the opposite—yet another reason why the word unprecedented is so crucial here.
Essential facemasks and mandatory six feet of distance weren’t features of the previous economic recessions, either. And, as Colby economists point out, these safety measures are likely going to be part of a new normal, especially in the labor market—with a marked effect on the economic recovery.
We will likely see permanent changes related to the maximum number of individuals allowed in establishments, more businesses conducting at-home delivery, and more jobs available to work from home than previously. Arman Gokgol-Kline ’00, partner at investment management firm Ruane, Cunniff & Goldfarb, points out that even when the economic shutdown eases, the population that is at-risk may remain in quarantine, further lowering economic activity.
It’s also likely that many businesses won’t survive the economic shutdown. Gokgol-Kline provides the following example: “You run a restaurant, and your restaurant makes a 5 percent profit margin per year. If you’re down for 20 percent of your year, you make no money. Shutting down these retail businesses that work on thin profit margins for sustained periods of time … the big question is going to be what kind of damage was done there.”
And if that restaurant was able to survive the shutdown, Findlay argues businesses “are going to spend significant resources making the establishment as safe as possible. If you take X tables and reduce them by a factor of 50 percent, if the restaurant doesn’t change prices, that’s a drop in revenue by percent. In that industry, some simply aren’t going to reopen.”
So what does this unprecedented decline in economic activity and skyrocketing unemployment projections mean for the job market? According to Donihue, “The jobs that Colby grads thought they were going to have just aren’t going to be there, at least not in the near term.”
However, “in a lot of ways, Colby grads are going to be well-suited due to their liberal arts background and their tenacity, their ability to pivot.”
The most resounding agreement among our economists? Colby students can rise to the challenge. “We’ve always said at Colby, we’re preparing our students for jobs that haven’t even been imagined yet,” Donihue said. “It’s the skills you learn here that help you not just become the entrepreneurs, but when new opportunities open up, you bring the skills you have to bear in those areas.”
Findlay agreed, adding, “No doubt it’s going to be challenging.” He urges students to “rely on your liberal arts education to think even more broadly about the types of things you’d be interested in doing, cast that net as widely as possible, and take full advantage of all the resources that Colby provides.”