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Thursday, January 12, 2006

The Economic and Social Costs of Unemployment

When economists teach about unemployment, they are careful to point out that the costs of unemployment go beyond the loss of GDP from having unemployed resources, there are also the human and social costs to consider. Here's a good example of this from Japan:

We have heard quite a bit lately about job tenure and worker security. The implication drawn by some from recent research showing that job tenure hasn't changed substantially in recent decades is that worker insecurity has not changed either (more discussion at TPM Cafe and in The New Yorker both of which note the broader costs).

But this research does not examine the costs of being unemployed. If the economic or social costs of unemployment rise, then worker insecurity will rise even if job tenure is unchanged.

For example, suppose that relative to the past it is more likely that job loss is due to structural rather than cyclical factors or competition, but average job tenure is unchanged. If the job loss is cyclical, the worker has a good chance of being rehired later. If the loss is due to competition, then a competitor will have jobs. But if it is structural and the loss is permanent, i.e. that particular job no longer exists anywhere, then it will be much more costly to be unemployed and worker anxiety will rise even though job tenure is unchanged, particularly if such workers are often rehired later in different occupations at much lower incomes. The point is that there is much more to worker insecurity then simply examining statistics on job tenure. For example, this research shows that income volatility has increased over time:

[S]cholars have concluded that incomes are much less stable - i.e., much more volatile - today than they have been in the past. 'There has unequivocally been general upward-trend income volatility since at least 1975,' ... [I]ncome volatility can wreak greater havoc now than it did in the past. ... It was generally thought that when families' incomes fell sharply and unexpectedly, they would borrow, tap into savings or send a second adult (frequently a mother) into the work force rather than sharply reduce consumption. But, Professor Chetty said, 'that no longer seems to be the case today.' Why? Many families already rely on two incomes.... THE factors that functioned as internal shock absorbers for families have weakened. And so, too, have external buffers. Over the last three decades, the percentage of workers covered by defined-benefit pension plans and employer-provided health insurance - guarantees that provide ballast for fluctuating incomes - has declined. Add this to the trend of rising volatility - especially for people in the lower and middle income levels - and it's easy to understand ... 'The real issue lurking behind this debate is whether we should have a program that provides the bedrock protection against economic risk.'

[Note: The graph is from Miracle to Malaise: What’s Next for Japan? in an Economic Letter from the Dallas Fed. I hope to have more on that paper later.]

    Posted by on Thursday, January 12, 2006 at 11:21 AM in Economics, Social Security, Unemployment | Permalink  TrackBack (0)  Comments (17)


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