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The Economic Cost of Unemployment

Updated on July 11, 2012

April, 2010

The economic costs of unemployment are widespread throughout the economy. The loss of income to the unemployed has a direct impact on the capabilities to purchase new products. There are also increased health and stress problems with the unemployed. All of these things contribute to increased government spending, tax cuts to stimulate the economy and job creation, and decreases in tax payments from the unemployed due to income losses. The economy will see a lower GDP since it will be operating inefficiently and produce lower outputs and incomes. This can also cause an increase in social issues. Areas of high unemployment will have an increase in crime and vandalism.

Unemployment rates have hit over 10 percent in the United states since the since the recession began almost two and a half years ago. More than 8.4 million jobs have been lost which is the most the country has seen since the Great Depression of the 1930’s according to an article from BusinessWeek, while speaking on NBC’s “Meet the Press” program, Federal Reserve Chairman Alan Greenspan. Greenspan stated it is “very difficult” to see U.S. unemployment falling soon and that an economic recovery is “going to be a slow, trudging thing.” and that “it’s very difficult to make the case that unemployment is coming down any time soon.” He also expects the unemployment rate to stay between 9 and ten percent for the rest of 2010 and says that Congress should make more tax cuts for small business to stimulate the creation of jobs (Bjerga, Del Giudice). This has become a huge focus of the White House this year although some Republicans tend to disagree with the President. Senator Jon Kyl of Arizona said in the Republican address “Most are just more government spending, leading to higher deficits and more debt -- and very few jobs,” regarding the Presidents stimulus plan and thinks that they should focus on reducing the deficit and not adding to it. “If we do these two things, private businesses and American families will be able to save, invest, and plan for the future,” he said (Johnson).

Since the unemployment rate has become so high in the United States and many other countries over the past few years, consumers need to adjust for reductions of income when they receive unemployment or full losses of income if not qualified for or expired their unemployment benefits. These reductions limit consumers from over spending as they try to cut back to make up for the reductions of income. In a recent study called The Anguish of Unemployment, all the unemployed people surveyed stated that they had cut their spending. More than half of those surveyed added they had to go into their savings or retirement accounts or borrowed money from friends. It also showed that more than one quarter of the participants needed to miss a mortgage or rent payment (Deprez). Since the unemployment rate has been high for so long, many have also lost their home due to foreclosures which has affected the real estate and financial markets. They have also had issues getting loans or found reduced credit availability as the financial industries needed to reduce credit availability with strict requirements to receive a loan or credit.

The gross domestic product (GDP), which calculates the dollar value of all goods and services produced over a certain time, has taken a decline in late 2007, 2008, and most of 2009 where a 3.5 percent increase was seen (Harding). This decrease in the GDP was controlled in most by the economic stimulus package that was signed by President Barrack Obama in early 2009. The package included major investments in road and bridge construction to build on the infrastructure and create more jobs, tax cuts and credits, funding for the “Cash for Clunkers” program to stimulate the automotive industry that was collapsing (Harding).

The stimulus package cost was about $862 billion dollars with about $300 billion dollars of that for tax cuts and credits and the rest for job growth and relief to just start the economy. “In tough times, when many families are having trouble just making it all work, tax day can seem even more daunting,” said President Obama during his weekly radio address “This year, however, many Americans are seeing some welcome relief.” The tax cuts included a $400 credit for working people, tuition, first time homebuyers and health insurance payments along with extensions for unemployment insurance payments. “These are among the tax breaks and savings that are available to over 100 million Americans right now,” President Obama added (Johnson).

The President had turned to a focus of creating a jobs and a healthcare bill after completing the stimulus package. Unemployment and healthcare have some relations together. The stimulus plan included some tax credits for the unemployed to assist with making expensive cobra payments although many were still unable to afford them. During The Anguish of Unemployment study, an overwhelming majority of the people surveyed experienced anxiety, helplessness, depression, and stress which added to sleeping problems, and relationship issues. If these lead to serious health issues, not having health care can put a strain on the health care resources when they look for assistance (Wisman).

Carl Van Horn, a Rutgers professor and co-author of the study stated in an interview "We don't tend to look at unemployment as having a psychological effect, just an economic one," and added the unemployed face financial, emotional, and social consequences. "Just as the Great Depression had a big effect, this is a major life-changing experience for people," he says. "It's not like getting over a cold—it's like recovering from serious illness." He also feels long term unemployment could lead to high divorce rates and more Americans to take financial risks.

Studies have also been able to put a link together with unemployment and crime rates that affect both the unemployed and have increased cost to society (Wisman). Studies from around the late 1980’s and 1990’s have shown that unemployment had a positive large impact on property crimes like burglary, car and bike theft (Edmark). They also show the opposite and a decline of property crime when unemployment declined (Raphael, Winter-Ebmer).

For many people unemployment is just a time period between jobs that they may have to cut back a little to survive until they find a new job but the unemployment rate has a huge impact on our economy. The government can plan for normal rates of unemployment and inflation but once they start to shift they begin to impact each other. The affects of unemployment can be felt throughout our society and economy which all has an impact on our GDP. The longer higher unemployment last will determine how much tax cuts and incentives the government may offer. They may need to make investments into our infrastructure to create new jobs fixing our roads and railroads, pay out for additional medical cost, or add additional resources to counter the raising crime rates. Whatever the solutions may be, the GDP will suffer from the lack of full employment and the addition policies and spending to get it back on track.


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      Howard Schneider 4 years ago from Parsippany, New Jersey

      Excellent analysis, iTommyGuns. The recession had horrible effects throughout our economy that are still being felt. The deficit balloons and unemployment, especially structural unemployment, expands. I also wish more infrastructure spending would have been implemented to stimulate job growth. Unfortunately this political climate precludes this option.

    • iTommyGuns profile image

      TommyGuns 5 years ago from Blakeslee, PA

      Thank you Janine. I was unemployed when I wrote this and felt many of the effects. I was able to get into a new field that I'm positive should be around a long time! I'm glad you found some happiness with your situation.

      @dwachira I can see some of it already. My kids are working hard to get through college. They both have two jobs plus school because I can't cover it all after being unemployed for so long

    • Janine Huldie profile image

      Janine Huldie 5 years ago from New York, New York

      I have been off and on unemployment since Summer 2010, when I was excessed from my teaching job and 5 months pregnant with my second. There are literally no teaching jobs out there and if I took another full-time job doing anything else I would barely be paying daycare for my 2 little kids. So I am now a stay at home and have loved this precious time with my kids, but seriously this economy and the unemployment situation has been anything but fun. Thanks for sharing and have voted up and shared too.

    • dwachira profile image

      [ Danson Wachira ] 5 years ago from Nairobi, Kenya

      It is a hard world with hard times. I wonder what will happen to next generations