Long-Term Unemployment Effects

OK, maybe I am flogging a dead horse here, but I think that the increasing length of unemployment is one of the most significant features of this recession versus previous ones.

The blue graph below shows the year-over-year change, in absolute numbers, of the unemployed by the four groups the government tracks. Granted, the population is much bigger now than it was in the earlier downturns, but that should affect all four groups the same.

The drop in short-term unemployment this month is pretty stunning. That might be good news indicating that the pace of layoffs has slowed significantly. But the pig is moving through the python, as people laid off earlier are not finding new jobs.

The year-over-year change in long-term unemployed is like nothing this country has ever experienced before, and the year-over-year changes in the next two groups, the 15 to 26 week unemployed, and the 5 to 14 week unemployed are both at new records by a comfortable margin.

Things don’t look quite as dire if we look at the same data on a year over year percentage basis, as shown in the purple graph, but in part that is because the jobs downturn has been already been going on for over a year, which is fairly rare. Still, for all of the groups but the short-term unemployed, it is the worst it has been since the mid-1970’s downturn.

This is particularly noticeable in the long-term and near-long-term unemployed. Even when measured against the mid-1970’s downturns, look at what happened back then — there were persistent and sharp decreases in longer-term unemployment, so the increases were happening against a backdrop of extremely low starting levels.

That was not true going into this downturn. Long-term unemployment tends to peak well after the recession is over, though it is sobering to note that as this recession started, the number of long-term unemployed was higher than during either of the prior two recessions (although in both cases the level was exceeded after the recession during the “jobless recovery” phase). This can be seen in the yellow graph.

Even if we were to assume that the recession were to have ended today, based on historical experience we have to expect that the number of long-term unemployed is going to continue to rise for quite some time — perhaps measured in years, not months. In the past two recessions, the vast majority of the increase in long-term unemployment came after the recession was officially over. In the 2001 recession, long-term unemployment increased by 1.23 million during the cycle, but only 410k, or 33% happened during the actual recession. In the 1990 recession, of the eventual 1.51 million increase during the cycle, only 17.5% happened during the actual recession.

In this respect, the last two recessions were not unusual, with the sharpest increases in long-term unemployment always happening either right at the end of the official recession or after it was over. If that pattern were to repeat this time around, the implications are frightening.

Taking the “better case” of the last recession, this means that since we have already seen long-term unemployment increase by 2.63 million, we could be looking at an eventual additional increase of 5.27 million in long-term unemployed. In that case, we would be getting close to 10 million people who were in danger of having no (legal) income whatsoever. That is about 3.3% of the total population, and does not count dependants. If we assume each of these 10 million has two dependants, then we are looking at 10% of the population in very dire financial straights.

Let us pray that “this time is different,” since that sort of increase in total long-term unemployment would start to turn large parts of this country into what we think of as the third world. However, the credit cycle dynamics of this recession argue for an even more gradual recovery than we saw in the last two downturns, meaning the increase in long-term unemployment could be even more severe.

If that were to happen, the mid-range retailers like J.C. Penney (JCP: 29.01 0.00 0.00%) and The Gap (GPS: 16.73 +0.10 +0.60%) would be devastated. Lower-end retailers like Family Dollar (FDO: 30.74 -0.12 -0.39%) would see their existing customer base hard pressed to spend even in their stores, but might see new entrants to their customer base (former JCP customers), and their focus on bare bones necessities might keep some of their current customers coming in (spending what I don’t know, but there is a certain level of consumption that is needed to survive).