Measuring the Costs of Unemployment

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  • 0:04 Unemployment Affects Everyone
  • 0:40 Individual Costs/Social Costs
  • 1:43 Business Costs
  • 2:31 Governmental Costs
  • 3:14 Unemployment, GDP & Okun's Law
  • 5:04 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Unemployment has serious effects on individuals, businesses, governments, and the economy in general. In this lesson, you'll learn how the costs of unemployment impose on each of these. We'll also take a look at Okun's law.

Unemployment Affects Everyone

The vast majority of people in modern economies rely upon trading their labor in exchange for the money they need to obtain food, shelter, and other necessities of life. In other words, most people work for others to make a living. If you're unemployed (or without a job), you don't have money for rent, groceries, transportation, health care, and other essentials of daily living. But that's not all. The negative effect of a high rate of unemployment reaches well beyond the personal financial consequences for unemployed people. Let's take a look at different ways to measure the true cost of unemployment.

Individual Costs

An unemployed person incurs many different economic and non-economic costs. Economically, unemployed people will often suffer a reduction in their standard of living as unemployment benefits often do not come close to replacing past income, and many unemployed people have inadequate savings to withstand even a few weeks of unemployment without defaulting on their financial obligations, such as mortgages, car loans, and credit cards. If you live paycheck-to-paycheck, missing one paycheck is all that is needed for financial ruin. Non-economic costs include the mental and emotional stress that can actually adversely affect your health.

Social Costs

Long periods of high unemployment can adversely affect an entire society. Unemployment may cause crime to increase. People may be less willing to volunteer and contribute to charities because they fear they may suffer unemployment. There may also be calls to restrict free trade and immigration in an effort to insulate the country from perceived threats that may cause a loss of even more jobs creating an 'us vs. them' mentality.

Business Costs

Unemployment costs businesses as well. The United States is a consumer-driven economy, which means most businesses make their money from the goods and services they sell to other people. Most consumers get the money to buy stuff from working. If too many people are unemployed, there's a decrease in demand. A decrease in demand means a company doesn't make money and may even have to lay off employees. These laid-off employees now don't have the money to buy goods and services from businesses, resulting in further reduction in demand, and the cycle may continue.

Also, keep in mind that unemployment benefits are funded through taxes assessed on employers. A high rate of sustained unemployment may increase the tax burden on businesses, which cuts into profits and investment, including hiring more people.

Governmental Costs

Unemployment imposes tangible costs on governments as well. The more people are unemployed, the more the state and federal governments must pay out money in unemployment insurance benefits, Medicaid, food stamps, and other social insurance programs. This extra spending either takes way from other government investments, such as defense, infrastructure, and scientific research; adds to governmental debt; or both. Moreover, people that aren't earning paychecks don't have an income to tax. Likewise, people that don't have a paycheck don't buy as much stuff subject to sales tax. This causes a decline in federal and state revenue and exasperates the fiscal problems.

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