Economic Ramifications of Skyrocketing Long-Term Unemployment 33 comments
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By Dirk van Dijk
The big under-reported part of the unemployment situation is the increasing duration of unemployment. Being out of work for three weeks is very different than being out of work for 30 weeks. While over half of the states and more than half the population does have extended unemployment benefits, it is a very scary prospect to not only be without a paycheck, but also having already exhausted your unemployment benefits. That means no income coming in, and given how low the savings rate has been over the past decade, likely no money period.
Economically it further depresses your spending, and psychologically it is just plain depressing. The average length of unemployment rose to 22.5 weeks in May from 21.4 weeks in April, and is up from 16.8 weeks a year ago. The median length of unemployment has also gone up sharply, reaching 14.9 weeks in May versus 12.5 weeks in April and 8.3 weeks a year ago. While the duration of unemployment always goes up during a recession, it has been particularly pronounced in this one (and the last expansion was noteworthy in how little it fell).
As can be seen in the graph below, on both measures the duration of unemployment far exceeds previous peaks. Also note that these measures normally continue to increase well past the end of the recession, which indicates to me that they are not about to stop rising any time soon.
We now have the unprecedented situation where the number of long-term unemployed (27 weeks or more) now outnumbers the short-term (less than five weeks) unemployed. Prior to last month this had never happened (well, the records were not kept during the Great Depression, but at least post-war it is unprecedented). The ratio of long-term to short-term rose to 1.21 from 1.10. That ratio has averaged 0.32 in the post-war period, and before this cycle the record was 0.78 hit in 1983.
A year ago, the ratio was an above average, but unexceptional 0.48. The number of short-term unemployed actually fell in May to 3.275 million from 3.346 million in April, and is virtually the same as a year ago (3.257 million). Short-term unemployed now represent just 22.4% of the unemployed versus 38.1% a year ago.
Long-term unemployment has skyrocketed. There are now 3.95 million Americans who have been out of work for more than half a year, up from 3.68 million in April and just 1.57 million a year ago. The next group down, those who have been out of work between 15 and 26 weeks, is also swelling rapidly -- rising to 3.054 million in May from 2.531 million in April and just 1.238 million a year ago.
If the long-term unemployed are people with mortgages, it is hard for me to see how they will continue to pay them. This means there is still more pain in the pipeline for firms closely tied to the mortgage industry like Fannie Mae (FNM), Freddie Mac (FRE) and the mortgage insurers like MGIC (MTG). In the past, they might have been able to refinance their houses and tap the equity to have the cash to continue to pay the monthly mortgage bill (not a great long-term strategy, but it could tide you over). That option is now closed off as most people have very little equity left in their houses.
If people still have room on their credit card limits, they will tend to max out the cards, not on frivolous stuff, but just to keep the lights on. Once the cards are maxed out, the next step is bankruptcy. This is not welcome news for big card issuers like Capital One (COF). Expect bankruptcy filings to continue to soar.
However, even bankruptcy does not help people that much since so many of the big debts that people have are non dischargeable. Thanks to hefty campaign contributions to key Senators (of both parties -- 13 Democrats went along with almost the whole GOP in caving to the banks), the terms of a mortgage on a primary residence cannot be changed even if you file (terms on the vacation house or the yacht can be changed, though). Student debt, taxes and child support payments also cannot be affected by the judge.
This recession has made almost all Americans (well, actually almost all people regardless of nationality given the worldwide nature of the downturn) poorer. However, it is long-term unemployment that tends to lead to destitution. Poverty is not a subject that comes up often when people talk about the market.
Since poor people don't have money, they don't count as far as the markets and the overall economy is concerned. After all, if the poorest 10% of the population were magically able to double their spending, it would hardly move the needle in terms of overall aggregate demand.
Where this increase in poverty is likely to show up is in the budgets of all levels of government. State and local governments are already under severe budgetary constraints, and California is teetering near the edge of bankruptcy. More desperately poor people are not going to help the situation. However, unless we want to see massive tent cities, and malnourishment bordering on starvation in this country, these people will either have to be taken care of by the government (Section 8 housing, food stamps, etc.) or they will have to find jobs.
Yes Friday's jobs report was far better than I had expected; however, let us not lose sight of the fact that the economy is still losing jobs at a historically very high rate. The rate of layoffs has slowed, but the pace of new hiring has not picked up. It will be a long, long time before the number of jobs surpasses the last peak of 115.8 million private sector jobs we hit in November of 2007. Until then, there will be plenty of pain from sea to shining sea.
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QUESTION: The chart on the X axis says "percentage" is that percentage unemployed ?
Can anyone else out there answer ?
This is a storm that has been brewing for decades, and our constant denial of it led to its expansion and implosion. I'm pretty sure no matter who is president over the next 3 to 4 terms, they are going to look pretty ridiculous, because there is no way they can fix this fast enough.
"I know that they are some who, despite all evidence to the contrary, still don't believe in the necessity and promise of this recovery," Obama said. "And I would suggest to them that they talk to the companies who, because of this plan, scrapped the idea of laying off employees and in fact decided to hire employees. Tell that to the Americans who received that unexpected call saying, `Come back to work.'"
On Jun 08 01:07 PM David Braunstein wrote:
> Great article! I believe that the Obama Administration will add many
> new government jobs directly and indirectly, but they will likely
> be lower paying jobs than before the economic crisis. We need retooling
> benefits to help those with long-term unemployment get trained for
> the new jobs primarily in "green" technology. Those "unforgivable"
> debts need to have the laws changed and soon. Loans need to be made
> to individuals based upon moral character that they will be paid
> back. If a person finds him/her self to become insolvent, then the
> loan needs to be restructured or forgiven by an impartial judge.
> A broad brush sweep that says judges can't renegotiate mortgages
> and student loans creates vastly unjust results as your article alludes.
> These is hope if our government can stand up to special interest
> groups and those profiting unjustly have to payback the debt they
> morally owe society.
www.uscourts.gov/Press...
Filings by Chapter:
For the 12-month period ending March 31, 2009, filings rose for all bankruptcy chapters.
* Chapter 7 filings rose 46.3 percent to 819,362, compared to the 560,015 Chapter 7 filings in the 12-month period ending March 31, 2008.
* Chapter 13 filings rose 10.9 percent to 370,875, from the 334,551 bankruptcies filed in the 12-month period ending March 31, 2008.
* Chapter 11 filings rose 69.1 percent, to 11,785, compared to the 6,971 Chapter 11 filings in the same time period in 2008.
* Chapter 12 filings rose 7.0 percent to 367, from the 343 filings for the 12-month period ending March 2008.
“4.5 percent of the work force has been out of work for 15 weeks or more. The worst previously seen- at least since 1948, when the government began counting people that way- was 4.2 percent, in December 1982.
Put another way, 21 percent of those who are unemployed have been out of work for at least 15 weeks. That is also a record, exceeding the 19.6 percent proportion seen during the 1958 recession. Since employment peaked in 2007, the number of total jobs is down by 4.3 percent, and the number of private-sector jobs is down by 5.4 percent. Those figures exceed the peaks since 1950 of 4.2 percent and 5.2 percent, respectively, set in that 1958 recession.”
Bankruptcy/debt discharge:
Residential mortgages are ‘nonrecourse’ – so you can walk away from them even without bankruptcy. The proposed legislation (since failed) wanted to give powers to judges so that they could alter the terms (lower).
Bankruptcy filings- 6000 a day.
On Jun 08 02:56 PM Dirtnap wrote:
> The partisan vitriol in some of these comments is just ridiculous.
> This is not something that was caused by either political party,
> it was caused by BOTH party's in cooperation with powerful corporate
> and financial interests, and let's not let the average consumer off
> the hook either.
>
> This is a storm that has been brewing for decades, and our constant
> denial of it led to its expansion and implosion. I'm pretty sure
> no matter who is president over the next 3 to 4 terms, they are going
> to look pretty ridiculous, because there is no way they can fix this
> fast enough.
the second point is that the system has been gamed to function the other way around for many years.
While corporate ceo pay now averages 300X the average worker, compared to 30X in the 70's. add to that the fact that real wages have been going down for 30 years. as the stock market and corporate profits have grown in a log manner, income has fallen. Do not forget that less than 50% of americans own stock, and that the great majority own very little of it. I fully understand your frustrations, and agree with you in some sense, but the opposite has been happening for a long time. Buffett has commented that he pays less as a percent in taxes than his secretary, and that recent tax cuts have tended to favor the wealthy. don't forget the inheritance tax. After all you can't take it with you.
At the time of this crisis we have had the greatest wealth dispartiy since the great depression. I do not believe that this is just a fluke. the structures that create this disparity are prone to instability, and that we would be much better off with a more stable system. I am not calling for a resdistribution of wealth per se, but a change in the system that allows for those who are productive in society to be able to share more in its benefits.
We should not redistrubute so much as make the system more fair.
On Jun 08 07:05 PM Alphameister wrote:
> Obama, Biden and their ilk have endorsed the principle of taking
> from those who have and giving to those who don't. It should come
> as no surprise when increasing numbers of the destitute choose to
> adopt the same principle while eliminating the governmental middle-man.
> I'm afraid we will be living in a very scary world for a very long
> time despite a probable further expansion of unemployment benefits
> and a likely weak and fragile economic recovery commencing this year.
this time, I wouldn't get a job with my existing skill set, which is finance and financial forecasting systems, being over 50. . .
since the US outsourced its mfg to china, its only fair that China buy the huge treasury demand to subsidize its customers and its customer's health care program. China should want its customer base to survive, correct? . . . only when mfg wages fall to the equivalent to China + shipping will the work return to the US. . . and that's a long way down.
sportsguy
On Jun 08 04:22 PM awake09 wrote:
> If anyone needs evidence that we are in the hands of a complete IDIOT
> president, read this quote from him at his cabinet meeting today.
> If you can make sense of the first part, the latter is political
> desperation on display:
>
> "I know that they are some who, despite all evidence to the contrary,
> still don't believe in the necessity and promise of this recovery,"
> Obama said. "And I would suggest to them that they talk to the companies
> who, because of this plan, scrapped the idea of laying off employees
> and in fact decided to hire employees. Tell that to the Americans
> who received that unexpected call saying, `Come back to work.'"
theburningplatform.com...
Once thing I can almost guarantee that will happen - if the govt tries to "solve" the unemployment situation through stimulus and spending programs we will have inflation... and probably inflation the likes of which Americans have not experience in a long, long time.
Note in addition to the above post, month over month filings are up nearly 30% to 134,xxx from 105,xxx.
During 2008, filings mainly hovered around 90k to 105k, so we're seeing a big bump.
On Jun 08 06:00 PM PainfullyAware wrote:
> Bankruptcy Stats:
> www.uscourts.gov/Press...
>
>
> Filings by Chapter:
> For the 12-month period ending March 31, 2009, filings rose for all
> bankruptcy chapters.
>
>
> * Chapter 7 filings rose 46.3 percent to 819,362, compared to the
> 560,015 Chapter 7 filings in the 12-month period ending March 31,
> 2008.
>
> * Chapter 13 filings rose 10.9 percent to 370,875, from the 334,551
> bankruptcies filed in the 12-month period ending March 31, 2008.
>
>
> * Chapter 11 filings rose 69.1 percent, to 11,785, compared to the
> 6,971 Chapter 11 filings in the same time period in 2008.
>
> * Chapter 12 filings rose 7.0 percent to 367, from the 343 filings
> for the 12-month period ending March 2008.
No amount of looking, studing, wishing, manipulating will make things as they are not.
None of us are in a position to fix, help or hurt at this point. I recommend we each follow a path in our own best interest from our current individual situations. We can watch the show, but we aren't on the stage.
I spent 17 months (2003-2005) unemployed and off radar because I did not have unemployment benefits. I was laid off again in 07 and in 08 and 09 I've been hanging by a thread as a contractor. I won't buy another home or make any long term plans on spending because I can't guarantee I'll even be able to stay employed at a livable wage level.
I think everyone has missed how bad employment has been for the last decade in general. Under employed, under paid, part time -employed as contractors, always in a constant state of downsizing. Even if you have a job these days it's only temporary maybe 1-5 yrs if you're really lucky and most of us have seen our jobs outsourced in some form too. We have a completely unstable employment market (which was in full swing before the meltdown) which will continue to undercut the economy, unless we rethink this cliff we've been throwing workers off for the last decade or more.
So even if employment numbers get better it just doesn't matter long term as long as jobs are all temporary in some form. We will still have a long term chronic pattern of income loss and income instability which in turn impacts spending, debt, purchasing ability and tax revenues.