Real Clear Markets

The Psychological Toll and Economic Fallout of High Unemployment

The job market continued to improve last year, but the pace of improvement was agonizingly slow. The unemployment rate edged down to 7.8%, a drop of 0.7% compared with the end of the previous year. Payroll employment grew 153,000 a month. Payroll gains in 2010, 2011, and 2012 have now offset a little more than half the loss in payroll jobs we suffered in 2008 and 2009. The net improvement is less than these numbers suggest, because we need employment to increase about 90,000 every month in order to accommodate the growth of the working-age population.

Two features of the recovery have inflicted harsh burdens on the nation’s unemployed. First, an exceptionally high proportion of unemployment has been long-term, that is, has lasted six months or longer. Second, since reaching a peak of 10% in October 2009, unemployment has fallen at a glacially slow pace.

Unemployment and the burden it imposes are very unequally distributed across the population. Young workers, employees in cyclically sensitive industries like construction and manufacturing, and members of historically disadvantaged minorities are more likely to suffer layoffs than other workers. The labor income of most unemployed workers falls to zero, and only part of it is replaced by unemployment compensation and other social benefits. Workers who lose their jobs after short spells of employment or who become unemployed after leaving school or rejoining the labor force seldom qualify for any unemployment benefits at all.

In many respects, U.S. public policy was unusually generous to the unemployed during the recent downturn. Compared with earlier post-war recessions, laid off Americans were eligible to receive unemployment compensation for an exceptionally long time—up to 99 weeks in some states with high unemployment rates. Even with these improvements, however, unemployment benefits remain less generous than they are in other rich industrialized countries. Laid off workers, especially those who suffer long spells of joblessness, receive less income protection in the United States than they do in most of Western Europe, for example.

The psychological toll of unemployment—and of long-term unemployment in particular—is known to be high. Surveys in many industrialized countries show that being unemployed reduces happiness. This finding is hardly surprising. What is more interesting is that the drop in happiness that accompanies unemployment is greater than the change in happiness that can be explained by the drop in income that accompanies job loss. It is widely known that, in a cross-section of people in the same country, differences in income help account for differences in individual happiness. Not surprisingly, people with higher income tend to be happier than people who have less income. Even accounting for the effects of income differences, however, people who describe themselves as unemployed are considerably less happy than the employed.

The gap in happiness between the unemployed and employed cannot be explained by differences in happiness that existed before job loss occurs. A number of longitudinal studies demonstrate that a sizeable drop in happiness accompanies or follows the involuntary loss of a job.

Both longitudinal and cross-section evidence suggests that the drop in individual happiness associated with unemployment is smaller in countries and regions where the average unemployment rate is high. In other words, massive and persistently high local unemployment seems to take some of the sting out of being unemployed. In a low-unemployment environment, the unemployed may feel more isolated in their suffering. If unemployment is more widespread, more peers may share an unemployed worker’s pain, lessening the psychological burden of living without paid work. For some of the unemployed, one side effect of the reduced psychological burden is that they devote less effort to finding another job. When reduced job-search effort results in slower re-employment, high joblessness can become to some degree self-perpetuating.

Thus, massive and persistent unemployment, by modestly reducing the psychological toll of joblessness, may indirectly create an environment in which long-term unemployment spells become more palatable and common. At the moment, U.S. unemployment is abnormally high as a result of fallout from a financial crisis and the massive loss of housing wealth. There is too little demand for goods and services produced in the United States to employ all the adults willing to work at the going wage. If high unemployment persists, the search behavior of the unemployed may change and make it more difficult to attain the full-employment unemployment rate we enjoyed in the middle of the last decade.

Sources

Andrew E. Clark (2003), “Unemployment as a Social Norm: Psychological Evidence from Panel Data,” Journal of Labor Economics 21(2) (April): 323-351.

Ed Diener and Martin E.P. Seligman (2004), “Beyond Money: Toward an Economy of Well-Being.” Psychological Science in the Public Interest 5: 1–31.

Rafael Di Tella, Robert J. MacCulloch and Andrew J. Oswald (2001), “Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness,” American Economic Review 91(1) (March): 335-341 .

Carol Graham (2008), “The Economics of Happiness,” The New Palgrave Dictionary of Economics 2nd Edition, Steven Durlauf and Larry Blume (eds.) (Hampshire: Palgrave MacMillan).

Liliana Winkelmann and Rainer Winkelmann (1998), “Why Are the Unemployed So Unhappy? Evidence from Panel Data,” Economica 65(257) (February): 1-15.