Consequences of Unemployment

Think of 10 grown-ups from your close circle. How many of them are actively working? In the U.S., over half of the population is active in the labor force¹. Of course, some people are already retired, cannot work, or do not prefer to work. However, for a significant share of people, not working is not a preference but a result of unemployment. But why is that and what are the consequences of unemployment? In this article, we will learn all about the causes and consequences of unemployment. If you are ready, let’s start learning!

What are the causes of unemployment and their consequences?

The main causes of unemployment are:

• frictional unemployment
• structural changes in the economy
• changes in consumer preferences
• outsourcing
• swings in the business cycle
• seasonal changes.

Uncertainty, decreases in consumption, high crime rates, and poverty are some consequences of unemployment.

To measure unemployment, we often use the term 'unemployment rate'.

The causes of unemployment are important to understand the underlying reasons and take necessary actions to reduce the unemployment rate. Economists identify several main causes of unemployment. Each cause affects how much unemployment can be reduced.

Frictional Unemployment

One of the causes of unemployment is the situation where workers switch between jobs for some reason. Generally, this leads to short-term unemployment and the resulting financial hardship is not so significant. Especially if the workers have the opportunity to choose and change their positions or jobs, there will always be people leaving their jobs and looking for new ones. Thus, this causes some level of unemployment to always be present in the short term.

Use of robots instead of workers to produce cars - Wikipedia Commons

Structural Unemployment

Another cause of unemployment is a fundamental change in the economy or consumer preferences. This leads to structural unemployment where the demand for workers would be decreased. Technological progress is usually the main reason for this fundamental change in the economy.

Think about adapting robots instead of human workers to produce cars in factories. Do not think only about physical robots - there are also machine learning and artificial intelligence technologies. What about adapting the chatbox technology to answer the customer’s questions using machine learning and reducing the need for real customer service personnel. As you can see from these examples, the use of technology becomes very wide in many jobs and that affects unemployment directly, usually negatively for middle-class workers.

Outsourcing

Outsourcing, which means hiring people from outside to do specific jobs, is another reason for unemployment. The intention is usually to decrease the operating costs by hiring people with lower wages from outside countries (or firms). Let’s say you call a customer service hotline, it would be very likely that the operator is not located in the U.S. but in another corner of the world, let’s say China or India. As long as the main firm can hire English-speaking workers from outside for lower costs, the firm would continue to outsource, and this decreases the available job opportunities in the main country.

Cyclical Unemployment

The swings in the business cycle are another cause of unemployment. Especially during recessions, people tend to save more and consume less. Naturally, some industries have to lay off some workers.

As an example, we can consider the 2001 recession, where more than 2 million workers were laid off.² Even though the economy improves later, it takes time for these workers to find a new job...and this leads to unemployment.

Parade of unemployed workers - Wikipedia Commons

Seasonal Unemployment

Seasonal changes are another reason for unemployment. During some seasons demand for some products might be higher and decrease suddenly as soon as the season ends. Think about the holiday season in December and how many workers a department store might need. However, after the peak time, some of the workers might lose their jobs since the demand decreased directly after the season ends.

All of these reasons can cause significant unemployment as we learn above. But what are the consequences of unemployment? We will analyze the consequences of unemployment on government, the economy, and individual perspectives in the following section. Let’s continue!

Consequences of unemployment on the economy

The consequences of unemployment are:

• uncertainty
• decreases in consumption
• high crime rates
• poverty

One consequence of unemployment on the economy is uncertainty. Do we have to know everything you might ask? Well, if you don’t it is not so good for the economy. If the economy is not stable in general, the raised uncertainty affects the economic decisions people are making on a daily basis.

Workers start to decrease their consumption because they might be afraid that they will be laid off shortly. Why do they have this concern? In a stable economy, workers would have no reason to lose their jobs or would believe that they can find a new job soon even if they are laid off. However, in an unstable economy, it is really hard to find jobs. As people start to consume less, this would decrease the demand for goods and services and leads to even higher levels of unemployment.

One consequence of unemployment on the economy is the GDP gap, in other words, the difference between the actual GDP and the potential GDP. The potential GDP shows the GDP that could be reached if all resources were used the most efficiently. We can analyze the GDP gap like the opportunity cost since it increases due to resources not being used.

Consequences of unemployment on government

The consequences of unemployment on the government are also uncertainty and instability. In an unstable economy with high unemployment rates, governments should consider their investment in public goods once more and probably prioritize their work to create more jobs to reduce unemployment.

Unemployment and instability have also consequences for politicians. In hard times, voters would be more likely to be dissatisfied and more likely to vote for a radical change that they would not agree with in better times.

Consequences of unemployment on individuals

As we discussed above, unemployment in the long term leads to instability in the economy which decreases consumption on average. Since this leads to further unemployment, the unemployed people would face even harder times finding a job. This vicious circle affects individuals in a negative way significantly.

Another consequence of unemployment on individuals is the high crime rates, increased substance abuse, or increased poverty in the nation. Since these factors also affect the welfare level, unemployment has an effect on each of us.

Consequences of long-term unemployment

Among the consequences of long-term unemployment, we can see the mental and material hardship unemployed workers face on an individual level. Further, an increase in poverty and the challenge to cover even the basic needs (food, accommodation, utility bills, etc.) becomes more common. On an economic level, inefficiency in the market is a crucial issue since high unemployment signals that the system operates inefficiently. The policy maker is especially concerned about the rate of long-term unemployment. But what is the long-term unemployment rate?

The long-term unemployment rate is the share of long-term unemployed people among all unemployed people. If this rate is high then it means that the cause of the unemployment is persistent and probably due to structural causes rather than a seasonal effect.