While I touched on unemployment duration at the end of my last blog, this is a very important subject and deserves a bit more elaboration. Quite simply being out of work for three or four weeks is a very different experience with very different economic implications than being out of work for six months to a year or more. The focus on the total number of unemployed obscures that reality. The thing that makes this recession so much different than the ones that have gone before it is how long people are staying out of work once they become unemployed. Yeah if you get laid off for a few weeks, it can be a pain in the butt, but essentially it is just an unplanned vacation. It does not really affect your long term financial solvency, nor do your job skills diminish significantly. After six months, regular state unemployment benefits expire.
Fortunately during recessions, the federal government usually will step in and provide emergency extended benefits. However this recession has gone on for so long, and we have so many long-term unemployed, that millions were in danger of losing even those extended benefits. Fortunately the Senate finally got around to extending those benefits for up to another 20 weeks (depending on the overall level of unemployment in that state). Still, unemployment benefits only replace a fraction of what people were earning before they lost their jobs. This means that as soon as people get their pink slips, they will reduce their spending. However, depending on how long they expect to be out of work, they do not bring their spending levels down all the way to their new unemployment insurance income level. There are all sorts of spending categories that are at least semi fixed. If you think you will get a new job soon, you don’t cancel little Jimmy’s ballet lessons, or Betty’s karate lessons. Instead you draw down your savings and use your American Express (AXP) card more.
However, as the weeks go by and you get no response from all the resumes you sent out, more and more things start to go by the wayside. But still does it make sense to quit the country club and lose the $20,000 initiation fee you paid, especially now that you actually have time to use it? Well after a few months you have to bite that bullet too. In the meantime, your non-retirement savings are probably about gone. Going into this recession the savings rate had been close to zero, so it is a pretty safe bet that most people did not have a lot of savings outside their 401-ks or IRAs. You have probably run up your balance on your credit card, but the card companies are getting wise to that and are starting to cut back the available credit limits for millions of accounts. That is a wise move on their part individually, but collectively for the economy, it acts to reduce overall demand.
Oh, and since a big factor in your credit rating is how much credit card debt you have relative to your available limit, both increasing your balance and the bank cutting back your maximum availability will conspire to knock off more than a hundred points from your FICO score. In past downturns, especially recent ones, if the unemployed person were a homeowner, he could tap the equity in the house. Now with millions and millions of homes worth less than the amount of the mortgage, or at least very close to it, that option is not open. Indeed this time around it seems that people are more likely to go in the other direction.
To survive, they are simply not paying on their mortgage and waiting for the sheriff to show up at the door to kick them out. Given the huge numbers of people who are falling behind on their mortgages, and to political efforts to slow the rate of foreclosures, this is actually a very rational strategy. In many parts of the country it has been possible to live rent and mortgage free for well over a year before actually getting kicked out of the house. That can free up a lot of cash to spend on other things. However, it is very bad news for the banks that lent the money like Bank of America (BAC) and Wells Fargo (WFC). It is also going to become a serious issue for the Federal Reserve since it is in the process of buying $1.25 trillion worth of mortgaged backed paper. True, the paper is guaranteed by Fannie (FNM) and Freddie (FRE), but since the taxpayers own 80% of both of them, what is the difference? People have to start tapping their 401-ks and IRAs. While the stock market has recovered nicely, it is still far below its peak, making that option even more painful, along with the 10% penalty imposed if you start to withdraw money from those accounts before retirement age.
By the time people have been out of work for six months or more, they have usually depleted their financial resources. Remember that on average, someone who is out of work has been out of work for 26.9 weeks now, and half of all the unemployed have been looking for work for more than 18.7 weeks. That smashes any record prior to this downturn. At the worst point in the Reagan recession, half of all the unemployed were out of work for more than 12.3 weeks. In fact, since the median duration started being tracked at the beginning of 1967, the median duration has only been in the double digits for 36 of those 502 months, and 14 of those have been during his downturn.
To those who say the stimulus bill has not helped, tell that to the almost 5.6 million people who have been out of work for more than six months. If not for the emergency benefits in that bill, they would be left with no income as soon as they passed that mark. I suspect that the vast majority of people who are in that category assumed that they would have found a new job by now when they first got laid off, and thus did not cut back their spending as fast as, in retrospect, they should have when they first got their pink
slip.
It is long term unemployment that is the hallmark of a recession. The graph below shows the number of unemployed (in thousands) in each duration group back to 1960. This is not adjusted for the rather substantial increase in the total population over that period, so some upward trend to the numbers would be normal. Notice how stable the pink short term unemployment line is. There are always people getting laid off, and people getting hired. In good times, the number of people becoming unemployed does not really fall that much, it is just that they don’t stay unemployed for all that long. They are either able to find a new job quickly, or in the case of many manufacturing jobs, get called back to work by their previous employer.
The light blue line of moderate length unemployment (5 to 14 weeks) shows a little bit more cyclical behavior, but nothing like the two longer term measures, the yellow 15 to 26 week group and the dark blue over 26 week long term group. What is striking about this recession is just how high that long term dark blue line has soared. While these graphs do not have the recession bars in, I would note that the level of long term unemployment usually continues to rise for many months after a recession ends. The shorter term groups tend to turn down well before the long term group does. This means that the situation is likely to continue to get worse before it gets better.
When these people do return to work, it is highly unlikely that they will be earning anything close to what they were earning before they got laid off. Many will be homeless, without any savings and in pretty desperate shape. We have already seen a steep rise in the poverty rate, which rose to 13.2% in 2008 from 12.5% in 2007 (see Census Bureau: Poverty Rising and Income, Poverty & Health Insurance).
Among children, the poverty rate rose to 19.0% in 2008 from 18.0% in 2007. I would be shocked if it does not exceed the one in five level when the statistics come out next summer for 2009. Since health care coverage is largely tied to employment in this country, the rising number of unemployed means that the number of people without health insurance, already at 46.3 million in 2008, is likely to jump further. While it is true that the stimulus package did subsidize COBRA insurance by as much as 65%, by the time people are unemployed for more than six months, it is very difficult for most of them to be able to afford even those subsidized premiums. When those people get sick, their only option is to go to the hospital emergency room, which is a very expensive and inefficient way of being treated. It is not free either, the hospital will try to bill them for the services, and even send debt collectors on them, although in most of these cases they will be trying to get blood from a stone.
For many, it simply means that they go without treatment, other than over-the-counter medicines they buy at Walgreen’s (WAG). If it turns out to be something more serious, it very often results in death. A Harvard study recently estimated that 46,000 Americans die prematurely each year because of a lack of health care coverage. That is a national disgrace.
While unemployment is a lagging indicator of the economy, it does play a role in the economy going forward. It will be very hard to sustain the surprisingly strong growth we have seen in recent months if we don’t start to see some improvement in the employment picture. Yes, huge improvements in productivity are good, but people on the ground need jobs.
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