Causes and Effects of Unemployment

Causes and Effects of Unemployment

Unemployment or joblessness is a state of life in which a person is missing a paid employment opportunity and is actively seeking work. Nowadays hundreds of millions of people are off the pay roll, roughly corresponding to about seven percent of the world’s population, whereas these rates can be much higher in regions of Southern and Western Africa or the Middle East. Furthermore, in the era of globalization and in a time of financial market disruptions unemployment is on the rise. As joblessness is so prevalent in the world, it is not surprising that socio-economical scientists are learning more about its causes, thus trying to mitigate the social and monetary consequences. Primarily, they distinguish between involuntary and voluntary induced unemployment.
The most frequent reasons for unemployment are involuntary by nature since all persons concerned got out of work due to structural or cyclical conditions of the industry. Both occur when demands in the labor market place cannot be accommodated. Structural unemployment often originates from a shift in the economy that makes it difficult for certain segments of the population to find new workplaces or to retain their jobs. Economists reveal that there is a mismatch between the jobs available and the skill levels of the unemployed. The processes of Industrialization in the second half of the 18th century or the recent Digital Revolution are only two examples for structural unemployment when there are technological advances in an industry. Those labor saving inventions have been replacing (unskilled) workers leading to a fall in demand for labor.
Besides this specific and broadly accepted explanation for unemployment, Keynesian economists bring forward the argument that cyclical factors can cause high unemployment rates, for going hand in hand with the business cycle. The higher gross domestic product (GDP), the lower will be the cyclical unemployment at the peak of the business cycle and the vice versa. For example, in the simultaneous recessions in Spain, Portugal and Greece the economic outputs of the market economies are declining and are below full capacity as the aggregated demands are falling. With a drop in production firms will employ fewer workers because they are producing fewer goods. Keynesians say in the long term salaries will adjust but if organizations and politics will not manage the cut in wages, this will lead to a further fall in consumer spending and aggregate demand, causing more unemployment. Even though this explanatory approach is highly controversial employees have limited influence on macroeconomic performance.
On the other hand, voluntary unemployment is defined as a situation when workers choose not to work rather than take jobs available. If excessively generous welfare benefits and high rates of income tax are created by the state, people may prefer to stay on benefits. This voluntary type of unemployment is likely to occur when the equilibrium wage rate is below the wage necessary to encourage individuals to supply their labor. In highly industrialized states with extensive welfare programs such as Germany or the Scandinavian countries some people tend to live on the public’s expenses as there is an absence of incentives to work. Voluntary joblessness is not necessarily associated with negative impacts yet frictional unemployment is a natural phenomenon since workers are searching for, or transitioning from one job to another. It exists because both jobs and workers are heterogeneous and mismatches result between the characteristics of supply and demand.
In accordance with the complexity of its causals, both driven by economic trends and personal decisions, unemployment may adversely affect the economic, socio-political, and personal well-being but it can also be an individual opportunity.
The economic costs of unemployment are very good assessed by the competent authorities of every state. For instance, the American state and federal governments have spent in excess of $320 billion through the end of 2010 for unemployment benefits, food assistance, and Medicaid. Nevertheless, these expenditures vary from one country to another. At the same time, those governments are no longer collecting the same levels on income tax as before; consequently, they are forced to advance money on securities or to cut back on other spending. An additional effect to the economy is the decrease of the spending power of an unemployed person and his or her family because they would rather save than spend their money at prior levels. This reduced spending capacity directly results in the drop of the GDP in our economies.
Moreover, high unemployment is not only using a high amount of monetary resources but can also encourages xenophobia and protectionism as workers fear that foreigners are stealing their jobs. Hence, the closure of the labor market and the reductions in trade harm the economic well-being of all trading partners. Other social costs include the way how people interact with each other. Several studies have shown that times of elevated unemployment often correlate both with less volunteerism and higher crime. If people have less disposable income than before, it is very likely that crime levels within the economy will increase due to the perceived necessity to meet own needs or simply to alleviate boredom. However, the volunteerism decline does not have an obvious explanation, but could perhaps be tied to the negative psychological impacts of being jobless.
These psychological effects of unemployment shape the mental health of the affected person, his or her family as well as community. As a result of involuntary joblessness people experience chronic lack of income as a decline in their standard of living, accompanied by anxiety and depressions in the long run. Prolonged unemployment can lead to an erosion of skills, basically robbing the economy of otherwise useful talents. At the same time, the experience of unemployment can alter how workers plan for their futures since they get more skeptical and pessimistic about the value of education and the role of government. In addition, studies have shown that long-term unemployment harms the mental health of workers and can actually worsen physical health and shorten lifespans. The burden of unintended joblessness can also negatively affect outcomes for children by an increase of punitive and arbitrary punishment; consequently, children of unemployed parents report more distress and depressive symptoms.
Still, unemployed persons are available for hire without being headhunted away from their existing employers. In contrast to all adverse aspects of unemployment voluntary nonworkers can seek for new challenges and likewise, they can overcome occupational and geographical immobilities by learning new skills applicable to a new industry or moving regions to get a new job.
In conclusion, a person’s involuntary unemployment can often result in financial embarrassments and emotional charges yet voluntary joblessness can be beneficial for both an individual and an entry society.