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Are We Ignoring the True Cost of Unemployment?

Feb 02, 2010 | By: Mr_Blue | Tags: unemployment, budget deficit, cost of unemployment

Hell yes. There are significant economic, social and personal costs attached to unemployment particularly long-term unemployment. The Obama Administration has chosen to ignore the true cost of unemployment in favor of deficit reduction.

The true costs of unemployment include economic, social and personal costs. The economic costs are very tangible: loss of aggregate demand (GDP), loss of income, increased income inequality, higher bankruptcy rates and foreclosure rates, even more debt both formal and informal, and underemployment are some that come to mind. The economic costs are fairly quantifiable. Then there are social and personal costs:

1) Increase crime
2) Political instability
3) Mental health issues including increase in suicides
4) Diminished health standards due to loss of employer provided health insurance
5) Skill loss
6) Negative effects on family life and community interactions

These costs are harder to quantify but they definitely are present. The problem for U.S. economy is that the true cost of unemployment has been accumulating since 2000:

The above graph shows the upward/increasing trend of median duration of unemployment in weeks. In 1999, median duration of unemployment was 5.8 weeks. Today, it is 20.5 weeks. No surprise, the number of people who have been unemployed for longer periods of time has been increasing as well:

This is a very desperate picture for our labor force and millions of families across the U.S.A.

Contrary to what the dominant economic policy preaches, federal government’s fiscal policy can have an impact on the economy and unemployment. According to USA Today’s exclusive report, a majority of “Top 50” economists surveyed said that the economic stimulus passed in February 2009 had a positive impact on the economy.

Unemployment would have hit 10.8% — higher than December’s 10% rate — without Obama’s $787 billion stimulus program, according to the economists’ median estimate. The difference would translate into another 1.2 million lost jobs.

Also from this USA Today report, two-thirds of the economists surveyed believed that the government should do more to spur job growth. The federal government can do more. It did it in response to the Great Depression in 1930’s. We are not talking half-ass, weak and poorly designed economic stimulus from February 2009. We need fiscal policies that have a goal of FULL EMPLOYMENT - a full out war on unemployment. We are talking direct jobs programs that address our needs, such as WPA or CCC, and a full payroll tax holiday.

In terms of fiscal policies, we are not getting anything close to FULL EMPLOYMENT from the Obama Administration. Take a look at the Office of Management and Budget unemployment projections:

(H/T to Prof. Paul Krugman: A Depressing Budget)

The above graph shows the administration expects high unemployment for years to come. It doesn’t have to be this way. This graph shows the Obama Administration is choosing to ignore the true cost of unemployment.

Why the choice? A weak attempt at budget deficit reduction. So, we have the business sector and households cutting back and now, the government sector. This doesn’t bode well for a strong recovery or much of any kind of recovery.

Good luck.