Unemployment creates a measurable cost for the economy and individuals. The opportunity cost of unemployment is immense when considering the scale of the U.S. economy.
When workers are unemployed, they are unable to produce output. According to the economist Arthur Okun, for every 1% that the official unemployment rate exceeds the natural rate of unemployment, there is a 2% gap between actual and potential real GDP. Given the GDP and unemployment figures from 2009, when actual output was $14 trillion and unemployment was 10%, and assuming a natural rate of 5%, actual output may have been $1 trillion to $2 trillion below its potential. By way of comparison, a $2 trillion output gap is like sacrificing the entire economic output of France.
The costs to the individual are heavy as well. An extended period of unemployment can wipe out a family’s personal savings and leave them in debt. Unemployment disrupts the normal flow of life and if prolonged can possibly lead to health and psychological problems for affected individuals. Also, the incidence of family violence is directly related to changes in the unemployment rate. Furthermore, periods of high unemployment are also associated with increases in the divorce rate and child abandonment.
Prolonged, pervasive unemployment is directly linked to crime and civil unrest. Areas plagued with persistent high unemployment are also plagued with both violent and property crime. A trip to America’s inner cities provides the anecdotal evidence for this. Much of the unrest in the developing world coincides with high rates of unemployment. It is a very rare day when someone takes the morning off of work to riot or blow something up. Unemployment, it seems, creates the necessary condition for many of the world’s problems.
High rates of unemployment also affect businesses, since unemployment benefits are largely provided through taxes on businesses. Additionally, state and local governments trying to raise revenue during periods of high unemployment often raise tax rates on businesses, reducing their ability to hire workers.
The U.S. economy has undergone several major shifts. Initially, the United States was an agrarian nation and most employment was related to farming. The Industrial Revolution saw a shift toward manufacturing employment. Today, most jobs are created in the service sector. As America moves away from agriculture and manufacturing, fewer and fewer jobs in those areas will remain. Globalization has shifted many low-skill jobs overseas, which leaves America’s unskilled workers with fewer opportunities.
Demand for labor is driven by worker productivity. The more skills workers possess, the greater the demand for their labor. To stay competitive, future workers must realize that they are not just competing against their fellow Americans but against the rest of the world. The days when you could graduate from high school and get a good-paying job at the factory are gone, unless, of course, you live in China. To compete in the global job market, Americans must be willing to train, stay mobile, and constantly adjust to the changing needs of their employers.
When it comes to the demographics of unemployment, the facts show significant differences between subpopulations:
To demonstrate the variance in unemployment, consider the difference in 2008 unemployment rates between married, white females over age 25 and single, black males under age 25. The rate for the first group was 3.3% while the rate for the second group was 17.5%. The most important demographic determinant of unemployment, however, is educational attainment. Even during recessions, unemployment rates for college graduates remain below 6%.
A glance at the Bureau of Labor Statistics report for May 2015 shows the unemployment rates for the following groups: