“What is the difference between a depression and a recession? A recession is when your neighbor loses her job, a depression is when you lose yours!”
Yes, an old joke, but it contains an important truth: Unemployment has very disparate impacts. A few people are hit very hard, while many more are not hurt at all.
The public generally sees inflation and unemployment as the two main things that can go wrong with an economy. Of these, inflation is usually rated as the worse alternative.
Why? Because nearly everyone perceives inflation’s effects.
Unemployment is more insidious. A small percentage of the labor force is out of work at any given time. If it is not you, or some close friend or relative, you may be aware of it, but it really does not hurt.
But for those affected, unemployment can be devastating.
First, there is the loss of income. Being out of work lowers a family’s consumption level and, if extended, makes a hit on net worth.
Losing a job also takes a psychological or emotional toll. Despite bumper stickers proclaiming that the vehicle driver is going to work only because “I owe,” most people find their work rewarding. More importantly, people’s jobs are an important component of their self-image and self-esteem. Regardless of the circumstances of a firing or a layoff, losing a job often conveys the message that what the worker was doing was not really important. Many go through an extended period of sadness or depression.
The psychological and financial blow to individuals translates into increased social problems. Suicide, substance abuse and family violence often rise along with unemployment. The educational performance of children tends to drop when parents lose jobs. Communities with high unemployment rates have more social problems than those with low ones.
From many economists’ point of view, unemployment represents potential output that is lost forever. Labor is the most important input in producing goods and services to meet the needs and wants of society.
High unemployment is bad, and economists who experienced the Great Depression placed great emphasis on reducing it through Keynsian policies of changing interest rates or government taxing and spending. But in practice, these policies often led to higher inflation with no permanent reduction in unemployment – the “stagflation” of the 1970s.
Younger economists who came of age during this period generally are much more skeptical of countercyclical fiscal and monetary policies. They place greater emphasis on measures to improve longer-run productivity growth and to ensure that excessive government regulation does not deter job creation.
European countries with a social-democratic or socialist tradition typically have many more laws and regulations about laying employees off. Those who lose their jobs get higher levels of compensation than in the United States.
But while the economic and psychological cost of layoffs on specific individuals is reduced, businesses create many fewer jobs. In fact, there were more new private-sector jobs in nearly any single years of the 1990s the United States than over the whole decade for the 12 countries that made up the European Union.
People see this tradeoff between job protection and job creation differently. Some economists wax rhapsodic about the wonderful degree of flexibility in U.S. labor markets and how it makes our lives better. Others take a more jaundiced view.
On the whole, however, nations that give employers broad flexibility in hiring and firing but that compensate laid off workers tend to have lower unemployment and faster economic growth than countries that make it difficult for employers to fire and hire.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.