The Cost of Unemployment to the Economy

Economists and academics make convincing arguments that a certain natural level of unemployment can't be erased but elevated unemployment imposes high costs on individuals, society, and the country. Most of the costs of unemployment are dead losses. There are no offsetting gains to the costs that everyone must bear.

The unemployment rate is open to interpretation depending on how it's measured. Underemployment can be extremely detrimental to the economy of society as well. Underemployment numbers include those who are working low-paying or low-skill jobs that don't provide enough full-time hours for benefits or to earn a living wage.

Global and national emergencies can trigger both unemployment and underemployment. Civilian employment plunged by 21 million from the fourth quarter of 2019 through the second quarter of 2022 due to the COVID-19 pandemic.

The situation was so serious that the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded unemployment benefits to self-employed and part-time workers through Pandemic Emergency Unemployment Assistance. It provided up to 39 weeks of benefits ending on or before Dec. 31, 2020.

Costs to the Individual

There's often an immediate impact on an individual's standard of living when they lose their job. The average savings rate in the U.S. had been drifting down toward zero and sometimes below before the Great Recession. There are anecdotal reports that the average person is only a few weeks away from serious financial trouble without a paying job.

Even those eligible for unemployment benefits and other forms of government assistance find that it's not enough because these benefits often replace only 50% or even less of their regular income so these people are consuming far less than usual. However, the economic consequences can go beyond just less consumption. Many people will turn to their retirement savings in a pinch and draining these savings has long-term ramifications.

Prolonged unemployment can lead to an erosion of skills, robbing the economy of otherwise useful talents. The experience of unemployment can alter how workers plan for their futures. Prolonged unemployment can lead to greater skepticism and pessimism. The absence of income created by unemployment can force families to deny educational opportunities to their children and deprive the economy of those future skills.

Last but not least, there are other costs to the individual. Studies have shown that prolonged unemployment harms workers' mental health and can worsen physical health and shorten lifespans.

Costs to Society

The social costs of unemployment are difficult to calculate but no less real. There are often increased calls for protectionism and severe restrictions on immigration when unemployment becomes a pervasive problem. Protectionism can not only lead to destructive retaliation among countries but reductions in trade also harm the economic well-being of all trading partners.

Other social costs include how people interact with each other. Studies have shown that times of elevated unemployment may correlate with less volunteerism and higher crime.

Costs to the Country

The economic costs of unemployment are probably more obvious when they're viewed through the lens of the national checkbook. Unemployment can lead to higher payments from state and federal governments for unemployment benefits, food assistance, and Medicaid.

Even those receiving government support can't spend at prior levels. The production of these workers leaves the economy. This reduces the gross domestic product (GDP) and moves the country away from the efficient allocation of its resources. Those who subscribe to Jean-Baptiste Say’s theory that the production of goods creates demand say that this is a serious issue.

It is also worth noting that companies pay a price for high unemployment as well. Unemployment benefits are financed largely by taxes assessed on businesses.

The Bottom Line

Governments worry about the consequences of inflation but unemployment is likewise a serious concern. Apart from the social unrest and disgruntlement that unemployment can produce, high unemployment can have a self-perpetuating negative impact on businesses and the country's economic health.

Worse still, some effects of unemployment are subtle and long-lasting. Consumer and business confidence are key to economic recoveries and workers must feel confident in their future to invest in developing the skills and building the savings that the economy needs to grow in the future. Unemployment costs go far beyond the accumulated sums handed out as unemployment insurance benefits.