What really sets this recession apart from all previous post-war recessions is the difficulty people have in going back to work after they have been laid off. In any economic environment, there are always jobs that are being lost, and new jobs created. It is the net number that is shown in the employment reports like we got this morning.

This time around, and particularly in recent months, it has not been that the economy has been losing old jobs are a super-high rate, but that there has been very little new hiring. One manifestation of this is that long-term unemployment, people who have been out of work for more than 26 weeks (the point at which regular state unemployment benefits usually run out), has simply exploded. The number of short-term unemployed is actually a fairly steady number over time.

The first graph below shows the number of unemployed by the four unemployment duration groups tracked by the BLS. Since the population is growing over time and with it the civilian work force (aided by an increase in the civilian participation rate, see this post from earlier today), there should be an overall upward slope to all four lines on the graph. The civilian work force has increased by 120% since the start of 1960. 

However, short-term unemployment has actually been in a bit of a secular decline sine the early 1980’s, and is generally fairly stable over time (pink line). What makes a recession a recession (OK, not technically) is that the number of long-term unemployed shoots up (black line on graph). In December, the number of long-term unemployed hit 6.130 million — the first time it has ever exceeded the 6 million mark (at least since the end of WWII, the data does not exist for during the Great Depression). Then again, this recession also marked the first time that the number of long-term unemployed topped 3 million, 4 million and 5 million.

The next graph shows the ratio of long term to short-term unemployed. Prior to this downturn it had never exceeded 0.79 (3/83). It now stands at 2.09. That is actually a small improvement over last month when it hit 2.12 as the number of short-term unemployed ticked up again this month, after having been in a downtrend for several months.

Long-term unemployment is a very different experience than being out of work for just a few weeks. The later is more like an unplanned vacation, particularly if you have good reason to think that you will be going back to work soon.  In that case, your income when you return to work is likely to be the same or higher than the job you left. You might run up your credit card balance a little bit, and you will probably run down your checking account, but you will not have to make major changes in your lifestyle.

As the jobless days turn into jobless months, the experience becomes very different both emotionally and financially. Your skills and contacts start to deteriorate, and when you do find a job, it is likely to be for far less money than you were making before. Meanwhile, you have probably maxed out your credit cards, and depleted your savings, including your 401-k and IRA’s (and paying big penalties to the IRS when you do so). In short, it takes you years to dig out from the experience, if you can ever manage to do so at all.

Last year there were 1.4 million personal bankruptcies in the U.S., the highest level since the draconian new bankruptcy laws came into effect in 2005. In 2010, that number is likely to rise further. This will mean still more write-offs for the big credit card companies like American Express (AXP) and Capital One (COF).

There are two basic measures of the duration of unemployment: the average, or mean, length of time people are out of work and the median (half over/half under) amount of time people are looking for work. Since it is impossible to be out of work for less than zero weeks, the average will always be higher than the median.

Both measures though are not only hitting record highs — they are off the charts in this recession. Prior to the Great Recession, the highest the average unemployment duration had ever reached was 21.3 weeks in July of 1983. Since 1967, the average level of this measure is 14.6 weeks. In December, it hit 29.1 weeks, up from 28.6 weeks in November and 19.6 weeks a year ago.

In other words, a year ago we were knocking on the door of a record, and we have now busted through it like SWAT team. This downturn has had a meaningful impact even on an average measure over more than 40 years.

The median length of unemployment also hit another new record this month — 20.5 weeks — up from 20.2 weeks in November, and 10.7 weeks a year ago. Prior to the Great Recession, the highest the median unemployment duration had ever reached was 12.3 weeks, and the long-term average is just 7.4 weeks (7.1 weeks if the current recession is excluded).

Think for a minute about the fact that regular unemployment benefits run out after 26 weeks in this context, when half of all of the unemployed have been out of work for 20.5 weeks. In all, except for the extended unemployment benefit provisions of the ARRA, 39.8% of all the unemployed in the country would have exhausted their unemployment benefits and had no source of income at all.

What would the impact be on those 6 million-plus Americans be, what would the impact be on their families? Even if you are cold blooded enough not to care about the humanitarian aspects of that, think what 6 million more people who could not even afford to shop at the Salvation Army would mean for retail sales. At least with the extended benefits, they can afford to shop at Big Lots (BIG) if not at Nordstrom’s (JWN).  

The net effect of that would have been even higher unemployment. We would have been in a self-reinforcing downward spiral. It is not for nothing that unemployment benefits are referred to by economists as automatic stabilizers. However, the automatic part just refers to the regular state benefits.

The problem with the ARRA is not that it is not working, but that it was simply too small to do the job given the massive problems the economy faced a year ago. Given the experience of previous, less severe, downturns, it is likely that the duration of unemployment measures will continue to rise over the next several months.

The net effect is that millions of people who used to be in the middle class will no longer be so, and will have a very tough time finding their way back. In the meantime, perhaps we need a food bank bailout to go along with the Wall Street bank bailout.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

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