Why the job market is worse than you think

Those out of work for six months or more are a growing part of the overall pool of unemployed, and that pool is likely to rise if the nation falls into recession.

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NEW YORK (CNNMoney.com) -- Ahead of Friday's January employment report, there is a lot of concern about the weakening job market, even as the unemployment rate stands at a relatively modest 5%.

The Federal Reserve cited evidence of a "softening in labor markets" when it announced both of its rate cuts this month. Congress is rushing to pass a $150 billion stimulus package that the Bush administration said should add 500,000 jobs to the economy.

The worries about the job market are widely shared on Main Street, Wall Street and inside the beltway.

The Conference Board's latest consumer confidence survey found that twice as many people believed there would be fewer jobs available six months from now than those who expected more jobs.

And a survey conducted for Fortune magazine from earlier this month found that just over one in four Americans are somewhat worried or very worried about losing their job in the next 12 months.

Economists surveyed by Briefing.com are forecasting that the unemployment rate will remain at 5% in Friday's report. However, it's worth a reminder that this is up from just 4.7% in November. And economists expect an addition of 70,000 jobs in the month, only a modest increase.

But the jobs numbers may be even worse than they first appear. That's because the number of Americans who have been out of work for six months or longer is on the rise.

Harder to find a new job The number of long-term unemployed stood at a seasonally-adjusted 1.3 million in December, up about 22 percent from year-earlier levels. The full-year average for 2007 was 1.2 million long-term unemployed, nearly double the reading for 2000 -- just before the last recession.

For all of 2007, about 17.6% of those who were unemployed had been out of work six months or more. That compares to only 11.4% who were long-term unemployed in 2000.

"You have to understand that 5% unemployment today is worse than 5% unemployment 10-15 years ago," said Jason Furman, senior fellow, Brookings Institution.

Furman and others say long-term unemployment is not just a problem for those struggling to find jobs. It poses a risk for the economy as a whole and cuts into household earnings and economic output.

If 5% of the labor force is unemployed for a short time as they switch jobs, they could keep spending, drawing on a combination of government assistance and personal savings.

But those who are unemployed more than six months lose unemployment insurance benefits and are more likely to deplete savings to the point where they are forced to cut back on spending.

They also will be far more likely to accept jobs at lower pay than their previous positions, which puts downward pressure on wages.

"We are looking at a labor market already that is weak and set to get a lot weaker," said Dean Baker, co-director of the Center for Economic and Policy Research.

Problem could get worse As the stimulus package makes its way through the Senate, there have been pushes to extend unemployment benefits beyond six months.

Even if it's not included in this bill, House Speaker Nancy Pelosi said she would support separate legislation to address the growing problem.

"While it might have been premature to extend benefits in the past at this level of unemployment, today it could be overdue," said Furman.

If the economy does enter a recession, the problem of long-term unemployment could reach levels not seen since the early 1980's, according to Baker.

A report from the Congressional Budget Office last October confirmed that the long-term unemployment problem is a growing one, suggesting there could be a fundamental shift in the labor markets.

"People are less likely to become unemployed than in the past, but those who do become unemployed are more likely to remain unemployed for more than half a year," said the October 2007 report.

Older work force playing a role The CBO report didn't have any easy answers for this trend. But it suggested that the aging of the work force might be a major contributing factor.

Baker agrees that the demographic shift is probably part of the problem.

"Someone well into their forties who loses their job at their peak earning potential, they might be expecting a higher pay than someone in their twenties," Baker said. "Even if they're willing to take a lower paying job, the employer might decide not to offer it to them because they'll fear the older worker won't be loyal."

The CBO report added that some firms are using temporary layoffs less frequently than in the past. When someone loses a job today, it's likely a permanent separation.

Employers and workers getting more picky Officials in job outplacement firms, hired by firms to work with employees who have lost their jobs, say they're seeing some increase in the time it takes to find new positions even for those generally better educated workers with whom they work.

Cory Holbrough, senior vice president of Lee Hecht Harrison, said that employers for skilled positions are becoming more selective about new hires than they used to be.

"In the past they might have hired the best person who had eight or nine of the ten skill sets they were looking for," he said. "Now they are saying, 'We want all ten skill sets.'"

John Challenger, CEO of Challenger, Gray & Christmas, said the much-publicized downturn in the housing market is also playing a role, as some job seekers are less willing to relocate to take a new job if it's going to mean taking a large loss on their current home.

Along those lines, he noted that 11% of job seekers relocated in the fourth quarter of 2007, down from 15.6 percent in the fourth quarter of 2006.