Ripple Effects of Unemployment

Practical Economics

Ripple Effects of Unemployment

The longer that workers are unemployed, the more all of us are affected.

Just about every time he gives a speech, Federal Reserve Chairman Ben Bernanke laments the fact that 42% of the 12.7 million people out of work have been unemployed for more than six months. That's the highest percentage on record, more than twice the percentage during the deep recession in the early 1980s.

Why the fuss over 5.3 million people out of a total civilian labor force of 154.7 million? Diane Swonk, chief economist with Mesirow Financial, looked over the numbers and has come up with a troubling conclusion.

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"Why do we care?" she says. "Because the costs of unemployment, particularly long-term unemployment, are cumulative." The shortfall builds, and it affects all of us.


Swonk points to studies showing that wages of workers laid off in the early 1980s fell by 30% and after 20 years were still more than 15% lower than when those workers originally lost their jobs. Even in regions of the country where layoffs weren't so bad, wage losses were "significant" 10 years later.

College graduates getting their first job tend to suffer an earnings shortfall that they never recoup. The earnings potential for boys is reduced if their fathers lose their jobs. The unemployed often turn to friends and relatives, borrowing to make ends meet. Parents drop visits to the doctor and skip filling prescriptions.

Colleges send graduates into a tight job market with debt. About 40% of those under 30 who have loans finish college with an average debt of $23,000, worsening the big financial burden on graduates struggling to find any job, much less one that pays well. Parents are drawn in to paying off loans. And more adult children move back home with mom and dad.

The bad effects ripple through society; 5.3 million long-term unemployed affects 5 million family members. That cuts the revenue of millions of small businesses, which postpone hiring and investing in new equipment and buildings.


What's most troubling is that nothing much is being done. Businesses that do want to hire can't find trained workers. In fact, governments are cutting funds for training programs and raising tuition at state universities. Even if money were easy to come by, there's little agreement on how to use it. Don't look for the November elections to deliver an answer. Congress is likely to remain divided. There won't be a majority of lawmakers eager to support new programs aimed at the long-term unemployed.

Economists looking for a silver lining say that the U.S. economy has long been too dependent on consumers who fill their houses and garages with expensive toys and gadgets. They say that the U.S. is undergoing a painful but necessary realignment of its economy, with more emphasis on exports and on businesses investing in buildings and equipment. The result will be more balance, lowering the 70% share of GDP provided by consumers.

But everyone will suffer in this process. When neighbors work for less pay or cannot find a job at all, it means less spent in department stores, restaurants, car dealers and so on. That squeezes hiring of store clerks, servers, car salespeople and others. The result is not a depression, or even a recession, but pokey, subpar growth that can't seem to pick up speed.

As Treasury Secretary Timothy Geithner said recently: "There's a paradox in this, in that the changes necessary to unwind the causes of the crisis and lay a more lasting foundation for future growth necessarily slow the pace of expansion." Growth slows -- for everyone, not just the long-term unemployed.