Exhausted Unemployment Benefits Could Pull Economy Under

by: Harold Fredrick

As I chronicled in a previous article on Seeking Alpha, the 28 million displaced workers in this country currently forgo approximately $850 billion in potential annual wages. As displaced workers typically spend the majority of their incomes, the $850 billion in lost wages represents nearly $850 billion taken directly from consumer spending. As I pointed out in the article, lost income of that magnitude is anathema to economy that's 60-70% consumer spending.

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Key Metrics:

  • Median income, full-time workers: $44,980
  • Unemployed workers: 14 million
  • Median income, unemployed workers: $15,340
  • Underemployed workers: 12 million
  • Median income, underemployed workers: $16,500
  • Marginally attached workers: 2 million
  • Median income, marginally attached workers: $0
  • Current potential annual earnings, displaced workers: $1.25944 trillion
  • Current actual annual earnings, displaced workers: $412.76 billion
  • Current lost annual income, displaced workers: $846.68 billion

And things might get scarier. According to a recent study published by the National Employment Law Project, 2 million unemployed are set to exhaust their benefits by the end of this year. Using my calculations, that means that, if the unemployment rate and rate of attrition remain unchanged through the rest of the year, displaced workers will be forgoing approximately $877 billion in potential annual wages on Dec. 31.

Key Metrics:

  • Potential annual earnings, displaced workers, Dec. 31, 2011: $1.25944 trillion
  • Actual annual earnings, displaced workers, Dec. 31, 2011: $382.08 billion
  • Lost annual income, displaced workers, Dec. 31, 2011: $877.36 billion

But that’s not the scariest part. NELP estimates that another 6 million unemployed will have exhausted their benefits by the end of 2012. And the 99 week federal emergency unemployment benefits program will have expired. This is key because nearly half of the unemployed are on the federal extended program. And many more will be in need of the program as the median duration of unemployment continues to climb past Great Depression levels. This chart gives me more nightmares than any horror movie did when I was a child:

Using my calculations, that means that, if the unemployment rate and rate of attrition remain unchanged through next year, displaced workers will be forgoing nearly $1.14 trillion in potential annual wages on Dec. 31, 2012.

Key Metrics:

  • Potential annual earnings, displaced workers, Dec. 31, 2012: $1.25944 trillion
  • Actual annual earnings, displaced workers, Dec. 31, 2012: $122.72 billion
  • Lost annual income, displaced workers, Dec. 31, 2012: $1.13672 trillion

A comparison of annual lost earnings by date:

If the unemployment situation does not remarkably improve by the end of next year or the government does not extend the 99 week emergency unemployment benefits program, consumer spending could pull the economy back into the pit.

Disclosure: I have been unable to find full-time work since earning my MBA in 2008. I have relied on the combination of unemployment benefits, freelance consulting, temporary jobs, and savings to survive. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.