A new article at TheStreet.com (here), entitled "A Serious Degradation in Employment", discusses the critical nature of the record collapse in employment and the labor force detailed in the latest Employment Situation Report from the DOL (U.S. Dept. of Labor).
After that article was written, the downward revision of job losses for 2008 and early 2009 was announced (discussed here).
Historic Number of Job Losses
An informative graphic from chartoftheday shows the historic nature of job loss in this recession.
They also have this companion graph:
The second largest deviation occurred in the 1981-82. In that case we had the highest unemployment (U-3 = 10.8%) since World War II, which was reached for both November and December, 1982, just as the recession ended.
Most expect unemployment to peak much after the recessions ends this time, paralleling the last two recessions in 1990-91 and 2001. See the following graph:
Unprecedented Duration of Unemployment
The only reason we have not exceeded the 1982 unemployment rate high is due to the unprecedented duration of unemployment, which increases the number of ex-workers becoming discouraged and stopping work searches. This is not a marginal effect, but is dramatic, as seen in the following graph:
The Shrinking Labor Force
The result of this long duration of unemployment is that the labor force is shrinking at an unprecedented rate as discouraged workers stop looking for employment and are dropped from both the unemployed count and the civilian labor force, according to the established survey procedures of the DOL (Dept. of Labor). The "Incredible Shrinking Labor Force" is the title of an article discussing this recently at TheStreet.com (here).
The contraction in the civilian labor force is seen in the following graph:
This downtrend has continued with the September Employment Situation Report, surpassing the all-time low established in late 2001. In September, the civilian labor force declined by another half a million (571,000) and the count of those "Not In The Labor Force" increased by 807,000. The decline in the labor force since May is over 1 million and the increase in the count of those not in the labor force has increased by nearly 2 million in the same four months. Incredible shrinking labor force indeed!
Effects on Real Unemployment
If the 1 million who left the labor enforce since May are added back to the labor force, as well as the total unemployed, the U-3 unemployment rate would be 10.4%. If the 2 million increase in the count of those not in the labor force are added to both the labor force and the unemployed, the U-3 unemployment rate would be 10.9%. The shrinkage of the labor force is seriously distorting the official unemployment numbers.
I will use a hypothetical example to illustrate. Let's say that we have a labor force of 2000 and the group not in the labor force numbers 1000. Assume the current number of unemployed is 200, so the unemployment rate is 10% (200/2000).
Now, what if 250 of those not in the labor force are merely discouraged and will return to the labor force and look for work when the economy improves. That would mean we could define the potential labor force as 2250 (250 + 2000), and the number of unemployed as 450 (250 + 200). Now the unemployment rate is 20% (450/2250).
These numbers may be larger (in proportion) than would apply to the actual labor force. You can plug in your own hypotheticals to test other proportionalities. For example, if 5% of those not in the labor force (instead of the 25% illustrated) are long-term discouraged (but still not permanently), the increase in the unemployment rate would be 2.2%, to 12.2% (250/2050).
Could We Remain Below Full Unemployment for a Decade?
Are we building an employment crisis so large that it could last for many years. Barry Ritholtz at The Big Picture (here) provides the following graphic:
If I extrapolate his two dotted lines they cross in the 2016 to 2017 time frame. Could the unemployment problem we are still developing be so great that it will take a decade to return to nominal full employment?
Conclusion
We are in economic territory that has not been seen in over half a century. We have the first major credit driven recession since the 1930s. In "normal" business cycle recessions, employment has bottomed within two years (usually within one year) of the end of the recession and has recovered within approximately 3-4 years to near nominal full employment.
We cannot assume that will happen this time. Conditions are not the same as we have experienced in the last 50 years. We not only have a credit crisis. We also have an employment crisis.
