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Visualizing the Link Between Unemployment and Recessions

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history of unemployment and recessions

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The Surprising Link Between Unemployment and Recessions

The U.S. labor market is having a strong start to 2023, adding 504,000 nonfarm payrolls in January, and 311,000 in February.

Both figures surpassed analyst expectations by a wide margin, and in January, the unemployment rate hit a 53-year low of 3.4%. With the recent release of February’s numbers, unemployment is now reported at a slightly higher 3.6%.

A low unemployment rate is a classic sign of a strong economy. However, as this visualization shows, unemployment often reaches a cyclical low point right before a recession materializes.

Reasons for the Trend

In an interview regarding the January jobs data, U.S. Treasury Secretary Janet Yellen made a bold statement:

You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years

While there’s nothing wrong with this assessment, the trend we’ve highlighted suggests that Yellen may need to backtrack in the near future. So why do recessions tend to begin after unemployment bottoms out?

The Economic Cycle

The economic cycle refers to the economy’s natural tendency to fluctuate between periods of growth and recession.

This can be thought of similarly to the four seasons in a year. An economy expands (spring), reaches a peak (summer), begins to contract (fall), then hits a trough (winter).

With this in mind, it’s reasonable to assume that a cyclical low in the unemployment rate (peak employment) is simply a sign that the economy has reached a high point.

Monetary Policy

During periods of low unemployment, employers may have a harder time finding workers. This forces them to offer higher wages, which can contribute to inflation.

For context, consider the labor shortage that emerged following the COVID-19 pandemic. We can see that U.S. wage growth (represented by a three-month moving average) has climbed substantially, and has held above 6% since March 2022.

The Federal Reserve, whose mandate is to ensure price stability, will take measures to prevent inflation from climbing too far. In practice, this involves raising interest rates, which makes borrowing more expensive and dampens economic activity. Companies are less likely to expand, reducing investment and cutting jobs. Consumers, on the other hand, reduce the amount of large purchases they make.

Because of these reactions, some believe that aggressive rate hikes by the Fed can either cause a recession, or make them worse. This is supported by recent research, which found that since 1950, central banks have been unable to slow inflation without a recession occurring shortly after.

Politicians Clash With Economists

The Fed has raised interest rates at an unprecedented pace since March 2022 to combat high inflation.

More recently, Fed Chairman Jerome Powell warned that interest rates could be raised even higher than originally expected if inflation continues above target. Senator Elizabeth Warren expressed concern that this would cost Americans their jobs, and ultimately, cause a recession.

According to the Fed’s own report, if you continue raising interest rates as you plan, unemployment will be 4.6% by the end of the year.
– Elizabeth Warren

Powell remains committed to bringing down inflation, but with the recent failures of Silicon Valley Bank and Signature Bank, some analysts believe there could be a pause coming in interest rate hikes.

Editor’s note: just after publication of this article, it was confirmed that U.S. interest rates were hiked by 25 basis points (bps) by the Federal Reserve.

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Mapped: The State of Economic Freedom in 2023

How free are people to control their own labor, property, and finances? This map reveals the state of economic freedom globally.

Published

1 day ago

on

June 6, 2023

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economic freedom

Mapped: The State of Economic Freedom in 2023

The concept of economic freedom serves as a vital framework for evaluating the extent to which individuals and businesses have the freedom to make economic decisions. In countries with low economic freedom, governments exert coercion and constraints on liberties, restricting choice for individuals and businesses, which can ultimately hinder prosperity.

The map above uses the annual Index of Economic Freedom from the Heritage Foundation to showcase the level of economic freedom in every country worldwide on a scale of 0-100, looking at factors like property rights, tax burdens, labor freedom, and so on.

The ranking categorizing scores of 80+ as free economies, 70-79.9 as mostly free, 60-69.9 as moderately free, 50-59.9 as mostly unfree, and 0-49.9 as repressed.

Measuring Economic Freedom

This ranking uses four broad categories with three key indicators each, both qualitative and quantitative, to measure economic freedom.

  1. Rule of law: property rights, judicial effectiveness, government integrity
  2. Size of government: tax burdens, fiscal health, government spending
  3. Regulatory efficiency: labor freedom, monetary freedom, business freedom
  4. Open markets: financial freedom, trade freedom, investment freedom

The 12 indicators are weighted equally and scored from 0-100. The overall score is then determined from the average of the 12 indicators.

Here’s a closer look at every country’s score:

RankCountry2023 Score
#1🇸🇬 Singapore83.9
#2🇨🇭 Switzerland83.8
#3🇮🇪 Ireland82.0
#4🇹🇼 Taiwan 80.7
#5🇳🇿 New Zealand78.9
#6🇪🇪 Estonia78.6
#7🇱🇺 Luxembourg78.4
#8🇳🇱 Netherlands78.0
#9🇩🇰 Denmark77.6
#10🇸🇪 Sweden77.5
#11🇫🇮 Finland77.1
#12🇳🇴 Norway76.9
#13🇦🇺 Australia74.8
#14🇩🇪 Germany73.7
#15🇰🇷 South Korea 73.7
#16🇨🇦 Canada73.7
#17🇱🇻 Latvia72.8
#18🇨🇾 Cyprus72.3
#19🇮🇸 Iceland72.2
#20🇱🇹 Lithuania72.2
#21🇨🇿 Czechia71.9
#22🇨🇱 Chile71.1
#23🇦🇹 Austria71.1
#24🇦🇪 United Arab Emirates70.9
#25🇺🇸 United States70.6
#26🇲🇺 Mauritius70.6
#27🇺🇾 Uruguay70.2
#28🇬🇧 United Kingdom69.9
#29🇧🇧 Barbados69.8
#30🇵🇹 Portugal69.5
#31🇯🇵 Japan69.3
#32🇧🇬 Bulgaria69.3
#33🇸🇰 Slovakia69.0
#34🇮🇱 Israel68.9
#35🇬🇪 Georgia68.7
#36🇶🇦 Qatar68.6
#37🇸🇮 Slovenia68.5
#38🇼🇸 Samoa68.3
#39🇯🇲 Jamaica68.1
#40🇵🇱 Poland67.7
#41🇲🇹 Malta67.5
#42🇲🇾 Malaysia67.3
#43🇧🇪 Belgium67.1
#44🇵🇪 Peru66.5
#45🇨🇷 Costa Rica66.5
#46🇭🇷 Croatia66.4
#47🇨🇻 Cabo Verde65.8
#48🇧🇳 Brunei Darussalam65.7
#49🇦🇱 Albania65.3
#50🇦🇲 Armenia65.1
#51🇪🇸 Spain65.0
#52🇧🇼 Botswana64.9
#53🇷🇴 Romania64.5
#54🇭🇺 Hungary64.1
#55🇵🇦 Panama63.8
#56🇲🇰 North Macedonia63.7
#57🇫🇷 France63.6
#58🇷🇸 Serbia63.5
#59🇻🇨 Saint Vincent and the Grenadines63.5
#60🇮🇩 Indonesia63.5
#61🇲🇽 Mexico63.2
#62🇨🇴 Colombia63.1
#63🇧🇦 Bosnia and Herzegovina62.9
#64🇬🇹 Guatemala62.7
#65🇩🇴 Dominican Republic62.6
#66🇧🇸 The Bahamas62.6
#67🇫🇲 Micronesia62.6
#68🇧🇭 Bahrain62.5
#69🇮🇹 Italy62.3
#70🇻🇺 Vanuatu62.1
#71🇰🇿 Kazakhstan62.1
#72🇻🇳 Vietnam61.8
#73🇲🇳 Mongolia61.7
#74🇸🇹 São Tomé and Príncipe61.5
#75🇦🇿 Azerbaijan61.4
#76🇵🇾 Paraguay61.0
#77🇲🇪 Montenegro60.9
#78🇽🇰 Kosovo60.7
#79🇱🇨 Saint Lucia60.7
#80🇹🇭 Thailand60.6
#81🇨🇮 Côte d'Ivoire60.4
#82🇹🇴 Tonga60.0
#83🇹🇿 Tanzania60.0
#84🇧🇯 Benin59.8
#85🇧🇿 Belize59.8
#86🇩🇲 Dominica59.7
#87🇸🇨 Seychelles59.5
#88🇹🇹 Trinidad and Tobago59.5
#89🇵🇭 Philippines59.3
#90🇧🇹 Bhutan59.0
#91🇲🇬 Madagascar58.9
#92🇰🇮 Kiribati58.8
#93🇯🇴 Jordan58.8
#94🇭🇳 Honduras58.7
#95🇴🇲 Oman58.5
#96🇲🇩 Moldova58.5
#97🇲🇦 Morocco58.4
#98🇸🇦 Saudi Arabia58.3
#99🇬🇭 Ghana58.0
#100🇫🇯 Fiji58.0
#101🇬🇲 The Gambia57.9
#102🇳🇦 Namibia57.7
#103🇸🇳 Senegal57.7
#104🇹🇷 Türkiye56.9
#105🇬🇾 Guyana56.9
#106🇬🇷 Greece56.9
#107🇸🇧 Solomon Islands56.9
#108🇰🇼 Kuwait56.7
#109🇺🇿 Uzbekistan56.5
#110🇰🇭 Cambodia56.5
#111🇧🇫 Burkina Faso56.2
#112🇬🇦 Gabon56.1
#113🇩🇯 Djibouti56.1
#114🇸🇻 El Salvador56.0
#115🇰🇬 Kyrgyzstan55.8
#116🇿🇦 South Africa55.7
#117🇲🇷 Mauritania55.3
#118🇹🇬 Togo55.3
#119🇪🇨 Ecuador55.0
#120🇸🇿 Eswatini54.9
#121🇳🇮 Nicaragua54.9
#122🇲🇱 Mali54.5
#123🇧🇩 Bangladesh54.4
#124🇳🇬 Nigeria53.9
#125🇷🇺 Russia53.8
#126🇳🇪 Niger53.7
#127🇧🇷 Brazil53.5
#128🇰🇲 Comoros53.5
#129🇬🇳 Guinea53.2
#130🇦🇴 Angola53.0
#131🇮🇳 India52.9
#132🇹🇳 Tunisia52.9
#133🇲🇼 Malawi52.8
#134🇲🇿 Mozambique52.5
#135🇰🇪 Kenya52.5
#136🇱🇰 Sri Lanka52.2
#137🇷🇼 Rwanda52.2
#138🇹🇩 Chad52.0
#139🇨🇲 Cameroon51.9
#140🇵🇬 Papua New Guinea51.7
#141🇱🇸 Lesotho51.6
#142🇳🇵 Nepal51.4
#143🇺🇬 Uganda51.4
#144🇦🇷 Argentina51.0
#145🇧🇾 Belarus51.0
#146🇹🇯 Tajikistan50.6
#147🇱🇦 Laos50.3
#148🇸🇱 Sierra Leone50.2
#149🇭🇹 Haiti49.9
#150🇱🇷 Liberia49.6
#151🇪🇬 Egypt49.6
#152🇵🇰 Pakistan49.4
#153🇬🇶 Equatorial Guinea48.3
#154🇨🇳 China48.3
#155🇪🇹 Ethiopia48.3
#156🇨🇬 Congo48.1
#157🇨🇩 Democratic Republic of the Congo47.9
#158🇿🇲 Zambia47.8
#159🇹🇱 Timor-Leste47.2
#160🇲🇻 Maldives46.6
#161🇹🇲 Turkmenistan46.5
#162🇲🇲 Myanmar46.5
#163🇸🇷 Suriname46.1
#164🇱🇧 Lebanon45.6
#165🇬🇼 Guinea-Bissau44.6
#166🇨🇫 Central African Republic43.8
#167🇧🇴 Bolivia43.4
#168🇩🇿 Algeria43.2
#169🇮🇷 Iran42.2
#170🇧🇮 Burundi41.9
#171🇪🇷 Eritrea39.5
#172🇿🇼 Zimbabwe39.0
#173🇸🇩 Sudan32.8
#174🇻🇪 Venezuela25.8
#175🇨🇺 Cuba24.3
#176🇰🇵 North Korea2.9
-🇮🇶 IraqN/A
-🇱🇾 LibyaN/A
-🇱🇮 LiechtensteinN/A
-AfghanistanN/A

Only four countries in the world have a score of 80 or above, Ireland, Singapore, Switzerland, and Taiwan, categorizing them as completely free economically.

Let’s now look at things from a more regional perspective.

Europe

map of economic freedom in europe in 2023

From a regional perspective, Europe ranks the strongest in economic freedom.

Despite being a powerhouse within Europe, Germany ranks 10th in the continent, with a score of 73.7. One of the categories Germany scored the weakest in was government spending (28.3/100). Over the last three years, government spending has averaged 49% of GDP.

Ireland ranks third globally, scoring particularly high in categories like property rights and judicial effectiveness. The country also has no minimum capital requirement—which is typically a banking regulation and corporate law issue determining how many assets an organization must hold—making it attractive for businesses to set up shop on the Emerald Isle.

Africa

map of economic freedom in Africa in 2023

Currently, Africa is the continent with the least economic freedom in the world, however, it is also the region with the highest potential for economic growth. A booming population, and thus, labor force, are promising for future innovation. In fact, it’s anticipated that Africa will see an increase of 2.5 billion people by the end of the century.

The lowest scoring country in Africa is Sudan, a country under further strain thanks to rife civil conflict. Historically, economic development has been constrained by rampant corruption and a lack of institutional capacity.

Conversely, Botswana registered the highest score on continental Africa (64.9), ranking higher than countries like France and Italy.

The Americas

map of economic freedom in the americas in 2023

In the Americas, the United States ranks 3rd regionally—25th overall—with a score of 70.6. The report attributes the categorization of U.S. as only “mostly free” to issues like inflation, increasing government debt, and unchecked deficit spending. Public debt currently sits at a figure equivalent to more than 128% of GDP.

In South America, Chile comes out on top, ranking above many other economic powerhouses like the U.S., the UK, and Japan. However, the 2021 election of a new Constitutional Assembly could risk the current economic state, as it favors a much more socialist approach to the economy.

East Asia and Oceania

map of economic freedom in asia and oceania in 2023

China’s score is among the lowest in East Asia & Oceania, ranking 154th in the world categorizing it as a repressed economy. The ruling Chinese Communist Party routinely exercises direct control over economic activity. China’s protectionist stance towards foreign investment and a plethora of trade tariffs imposed by other nations also factor in here.

In India, where public debt is equivalent to about 84% of GDP, fiscal health is the worst-scoring category. Additionally, much of the economy remains quite informal; a large share of people work in jobs without tax slips, recorded income, or formal contracts protecting them, which challenges labor freedoms.

The Middle East and Central Asia

map of economic freedom in the middle east and central asia in 2023

It may come as no surprise that the United Arab Emirates has the highest score in the Middle East. The UAE has implemented various measures and initiatives, such as tax exemptions, duty-free zones, streamlined business registration processes, and flexible regulatory frameworks to encourage entrepreneurship and foreign direct investment. As well, the top individual and corporate tax rates in the country are 0%.

Türkiye’s lowest scoring category relates to judiciary effectiveness and the rule of law. President Recep Tayyip Erdoğan, who has already been in power for two decades, recently won the country’s election, again cementing his authority over Turkish politics. This makes it unlikely that Türkiye’s economic freedom score will recover in the short to medium term.

Where Does This Data Come From?

Source: The Index of Economic Freedom from the Heritage Foundation

Data notes: A number of countries were not ranked due to unavailable data or other factors, like ongoing war, that made it difficult to properly assess the economy. These countries include: Ukraine, Afghanistan, Iraq, Libya, Liechtenstein, Somalia, Syria, and Yemen.

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