Unemployment Duration Still Rising - Analyst Blog

While we got some very good news with the employment report today (see “Unemployment Report – WOW!”), there was one part of the report that was very troubling. While it looks like the number of people entering the pool of unemployed is falling, once people are out of work it is extremely difficult for them to find new jobs.

The number of people who have been out of work for a long time is frightening. On average, people who are out of work have been so for 28.5 weeks, up from 26.9 weeks in October and 26.2 weeks in September. Now, the average is perhaps not the best measure, since it is inherently skewed — after all it is impossible to be unemployed for fewer than 0 weeks. That, however, was just as true in 1950 as in 2000, so on a relative basis it is still a worthwhile measure to look at.

Thus the median (half above, half below) is a better measure, although as shown on the first graph below, the record for the median only goes back to 1967 while the record for the average goes back to 1948. But either way you measure it, the numbers are simply off the charts. Based on the average, prior to this downturn, the duration of unemployment had only exceeded 20 weeks in 8 months since the data started, or 1.09% of the time. The previous peak was 21.4 set back in July of 1983. We have now been above the 20 mark for 9 straight months.

The median tells a similar story. Prior to the Great Recession, the record was 12.3 weeks in May of 1983. It had only exceeded 10.0 in 21 months worth of records, or 4.25% of the time. We have now been in double digits for 15 straight months. The long-term arate for the average is 13.7 weeks, and for the median it is 7.4 weeks.

Long-term unemployment is a very different thing than just being out of work for a few weeks. Short-term unemployment is more like an unscheduled vacation, particularly if you know your old job will be coming back soon (as was the typical pattern in earlier recessions, Ford [F] might lay people off in a downturn, but the UAW members knew they would be going back to the same job as soon as auto sales picked up). That started to change in the early 1980’s downturn, when many of the plants were shut for good.

Partly as a result, even in good times the average length of unemployment has been getting longer with each expansion since the 1960’s. In fact, at the peak of the last expansion, the average length of unemployment far exceeded the worst levels of the 1948 recession. The 1948 recession was the only previous one to come near this one in terms of the total percentage of jobs lost to the economy.

Financially, long-term unemployment is devastating. When people are first laid off they will cut back their spending a little bit. Some of those savings are easy, or almost automatic. If you are no longer going to work each day, your commuting expenses go away, you might not need to go to the dry cleaners as often, and you no longer have lunch at a restaurant. However, other discretionary spending is at least partially locked in, and it does not make that much sense to pull little Jane or Jimmy out of their ballet or karate lessons. If you are a member of a country club, you don’t resign your membership right away. You don’t cancel HBO — heck, you finally have some time to watch it.

Regular unemployment benefits provide you with some income, generally about 60% of what you were making before you got laid off (this varies by state). This is not enough for most people, so they start to draw down savings and run up their credit card balances. However, the vast majority of people have very little in the way of savings, outside of retirement accounts (IRAs and 401-Ks) and tapping those is not an attractive option since they get hit with a tax penalty of 10%, in addition to having to pay income tax on what they take out.

As unemployment drags on, more and more cuts have to be made. Eventually, the savings run out and the credit cards get maxed out. These people are then at a huge risk of declaring bankruptcy. The big credit card companies like American Express (AXP) and Capital One (COF) recognize this and have been very busy lately either cancelling people’s cards or reducing their credit limits. From their point of view, it is much better if someone defaults on their cards when they max out at $5,000 rather than letting them run up the balance to $20,000 before they default.

In the past if they were homeowners, they could tap the equity in their houses by refinancing or taking out a second mortgage. But with so many homeowners already underwater on their houses, or close to it, that option is simply no longer available.

Under normal circumstances, regular state unemployment benefits run out after 26 weeks, although during recessions, the federal government will usually step in with extended benefits. That has happened this time around, and there are almost as many people on federal extended benefits (4.457 million) as there are on regular state benefits (5.465 million).

Keep in mind that median number of 20.1 weeks in the context of the 26 weeks of regular benefits. Put another way, 38.3% of all the unemployed in November had been out of work for more than 26 weeks, up from 35.6% in October. The chart below tracks the unemployed by the length they have been out of work back to 1960. Note that historically, short-term unemployed (pink and light blue lines) tend to far exceed long-term unemployed (yellow and especially the dark blue lines). Short-term unemployment tends to be very stable over time (the numbers are not population adjusted, so there should be a slight upward secular tilt over time to all the lines, but the cyclical influences are stronger).

It is the number of long-term unemployed that really make the difference between boom and bust. Note that we have already started to see the numbers in the shorter-term groups start to decline, while the dark blue line of the very long-term unemployed continues its rocket shot higher.

For those who dare make the claim that the Stimulus Bill has not made a difference, I would tell them to go talk to the more than 4.4 million Americans (and their families) that would have been left with no income at all if it had not been for the bill. Those are people who would have to do their banking at the local food bank, not at JP Morgan Chase (JPM). They would be hard pressed to do their holiday shopping at Goodwill, let alone Wal-Mart (WMT). If they could not spend, then those businesses would have had to lay off more people, creating a self-reinforcing downward spiral.

Perhaps an even better way to understand this is by looking at the ratio between those out of work for fewer than five weeks and those who have been job hunting for more than six months, which is presented in the next graph. The long-term average of this ratio is 0.37. Prior to this downturn, the highest it had ever gotten to was 0.78 in March of 1983. Now the ratio is at 2.10, a significant milestone crossing 2.0 for the first time ever, and up from 1.78 in October.

We are now bumping up against 6 million people who have been out of work for more than six months. The damage done goes well beyond the immediate economic consequences of depleted savings. Psychologically, it starts to take a toll on your sense of self worth. Your skills also start to degrade. The sad fact is that even when you do find a new job it is likely to be at a substantially lower salary than at your old job.

What we are looking at is the further destruction of the middle class in this country. To the extent that those nearly six million were in the middle class before they lost their jobs, many if not most will not longer be when they finally do find a new job. This could have very serious long-term consequences for the very stability of American society.

Thus, despite the encouraging overall job numbers in today’s report, bringing down unemployment has to be the most important job right now for both the administration and the Federal Reserve. Any talk of the Fed tightening soon is simply irresponsible and the Fed should ignore such calls.

With this much slack in the economy there is almost no danger of inflation taking off any time soon, particularly core inflation. While President Obama was between a rock and a hard place when it came to Afghanistan, that extra $30 billion a year could have been far more productively used as part of a jobs program. Yes, the deficit is a big concern over the long term, but right now it should not be.

This long-term unemployment problem is simply much more important. If we don’t get the economy moving again, there will not be much of a tax base in any case, and the deficit will continue to be a problem. The Stimulus Bill has helped, and as the decline in the number of short-term unemployed indicates, it has largely solved the problem of people getting laid off.

However, we have not yet gotten to the other part of the equation — actually creating new jobs for those that have been laid off. Doing so will require spending some money. Probably the lowest-cost way of doing so would be a WPA-style jobs program, perhaps focused on doing things like refurbishing schools to make them more energy efficient. Another potential way of creating a lot of jobs would be for a partial tax holiday on the payroll tax, perhaps by exempting the first $20,000 of income from both the employee side (would provide more discretionary income, particularly to people who are likely to send it quickly) and the employer side (would directly lower the cost of hiring people).

Passing health care reform would also help the situation, since it would encourage entrepreneurship. Right now, anyone who has a family member with a pre-existing condition would have to be nuts to quit their job and strike out on their own. They simply would not be able to get health insurance at any sort of reasonable rate. If they were able to get it, the cost would quickly eat up the working capital they need to get the business going. Going without insurance would be a huge gamble since any sickness would quickly wipe them out.

Thus people try to hold on to the job they have, even if they hate it. If they had the safety net of affordable health insurance, they would be more willing to strike out on their own. After a little while, many of those businesses would succeed enough to be able to hire additional people and thus bring down the unemployment rate. According to the CBO, the current plans would also bring DOWN the long-term deficits as well, and the CBO model does not even include this entrepreneurship effect.