Unemployment in Greece Hits Depression Levels—And Is Headed Higher

The pain will get worse before the battered nation recovers.

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It was once the cradle of democracy, but these days Greece is better known as a land passed over by modern economics.

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The Greek government recently announced that the nation's unemployment rate hit 24.4 percent this summer, a searing level of joblessness reminiscent of the Great Depression.

Among young people aged 14 to 24, unemployment is a staggering 55 percent. More startling still is the fact that surging unemployment is the deliberate result of government policies meant to thin out bloated payrolls. To save the Greek economy, it seems, it's necessary to kill it first.

Unlike other weak economies, stable employment in Greece has actually been a big part of its economic problem. Nearly one-quarter of the Greek workforce is employed by the government, one of the highest rates in the world. In the United States—which supposedly has its own bloated government—just 16 percent of employees work for the government, at any level. Plus, in Greece, many relatives of government employees receive under-the-table pay or other unreported subsidies.

Greece also suffers from massive tax evasion--which means there's not enough money to pay all those government workers—along with widespread nepotism and laughable work rules. Some workers can retire with full pensions while still in their 40s. The government pays bonuses for things like using a computer and working outdoors.

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A Greek government providing jobs for life led to falling unemployment from 2000 to 2008, but all the borrowed money required to keep the mirage intact meant the government workforce would have to shrink dramatically at some point. That's what's happening now.

Earlier this year, the Greek government finally began paring its bloated federal workforce, and there's more bloodletting to come. Greece has committed to cutting 100,000 government jobs by the end of the year, while also slashing welfare payments and other social spending. So unemployment is likely to rise further, even as Greece's safety net continues to erode.

These are the kinds of reforms that other European nations providing bailout money have insisted upon, and at some point, the punishing austerity may help Greece exit the economic dark ages and become more competitive. But so far it has mostly generated pain.

The Greek economy has been contracting since 2008, and has shrunk by about 20 percent so far. That's about five times as severe as the U.S. recession that ran from late 2007 until mid 2009. Moody's Analytics predicts that the Greek economy won't start growing again until 2014, at the earliest. If Greece leaves the euro zone and must undergo a chaotic return to the drachma, the misery could last longer.

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There are a few signs that the awful medicine is starting to work. Greece's budget deficit has been falling, for instance, which makes the battered nation less dependent on borrowed money. But the cutbacks have also made the economic downturn deeper and spread the economic misery wider, risking a total meltdown before Greece ever turns the corner. Economists disagree about the best way to pull a sunken economy out of such a big hole, but they do agree on one thing: It's a horrible hole to fall into in the first place.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.