Why Unemployment Is Bad

Unemployment creates a measurable cost for the economy and individuals.

The opportunity cost of unemployment is immense when considering the scale of the United States 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.

Incentives matter. A string of bus bombings in Israel drew worldwide attention when it was discovered that the families of suicide bombers were being paid upwards of $30,000 by Iran. Unemployment rates are extremely high in the West Bank, and for some, the money made by killing themselves was greater than what could be made given severely limited employment opportunities.

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 day off of work to riot or blow something up. Unemployment, it seems, creates the necessary condition for many of the world's problems.

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