The Effects of Unemployment

There’s relatively little coverage of the effects of unemployment on the economy, people and society, despite a mass of coverage over rates and counts. The consequences do need to be addressed directly, because they are usually more extensive than we might imagine.

In this article I’m going to cover the range of problems that stem from unemployment.

‘Worklessness’ is a catch-all term that includes those working-age people who are excluded from the usual statistics about the unemployed (which only count the involuntarily unemployed who are actively seeking work) and it usually gives a more complete picture of the extent of the problems that arise. This is because there is a great deal of hidden unemployment that gets missed from the official statistics.

There are three broad categories of unemployment problems that occur, depending on the unit being analyzed i.e., those that accrue to the economy, those that accrue to society as a whole, and those that accrue to the individuals directly. I’ll explain each of these in turn, how they develop, and why they can sometimes persist for many years.

Finally, I’ll draw upon my own education and experiences to offer a simple solution.

The Effects of Unemployment on the Economy

Let’s start with the effects of unemployment on the economy, in terms of how much national income is reduced as a result of it. There is no one standard method of estimating this cost, and any online search for an estimate will prove disappointing because information is generally lacking. Nevertheless, I can use a simple back-of-the-envelope calculation technique from the available UK labour market data.

To avoid the problems of unemployment measures, with regard to who qualifies and who does not, I’ll be focusing on employment instead. This is not a perfect measure, and some low employment areas may only be so because of a high number of young people studying in college/university. 

There are also problems of accounting for part-time versus full-time employment, and no measure can capture ‘underemployment’ where a worker is employed but in an occupation below that for which he/she is qualified/skilled. Nevertheless, I do think that employment it is a better metric than the official unemployment statistics, because they under report the real rate by a wide margin – see my report about hidden unemployment for more details on that.

By looking at the employment rates, average salaries for workers, and the working-age populations of 352 unitary authorities across Great Britain (a few authorities are missing due to lack of data) and then ordering them according to their employment rates, we can compare the average employment rate in the top half of authority areas to the bottom half of authority areas. (The figures are compiled from 2020 to mid-2021 data).

  • Group 1 – 81% employment rate, £32,848 average salary, 17.4m working-age population
  • Group 2 – 72% employment rate, £31,340 average salary, 21.7m working-age population

A few simple calculations shows that group 2 makes around £88 billion less in salaries than group 1. Furthermore, since salaries are known to represent roughly 60% of the total value of production, the total shortfall in economic output for group 2 is more probably around £147 billion.

That’s over 9% of total national income in Great Britain.

These are very rough estimates, but it gives an idea of the full cost of unemployment in terms of lost potential national income. To put it into context, £147 billion is a figure that’s comparable to the UK’s entire healthcare budget.

Impact of Unemployment on Businesses

The impact of unemployment on businesses can be severe when geographically concentrated. The 20 unitary authorities with the lowest employment rates averaged just 64.7% employed, with average salaries for workers of just £29,952. In these areas the local purchasing power (even after welfare payments are added) is insufficient to support a thriving local business community. 

That, however, is just the beginning.

Drilling down to a deeper level, to actual communities within local authority areas, employment rates often fall below 50%, and although salary data is unavailable at this local level, it is known that a much larger proportion of the few jobs that do exist in these areas are part-time, entry-level, low-skill jobs. This coincides with higher crime levels and all sorts of other societal problems.

The Effects of Unemployment on Society

The consequences of unemployment increasing so rapidly in the UK during the 1980s were extreme, and the whole experience provides a good case-study of the long-term effects of unemployment on society when it is geographically concentrated.

The root cause of the job losses was the economic turmoil of the times. The OPEC oil price rises in the 1970s had caused the pound sterling to appreciate very sharply because Britain was a major oil producer, and the higher exchange rate meant that the competitiveness of UK manufactured products fell sharply.

At the same time the Thatcher government was engaged in an all-out war with the National Union of Mineworkers over proposed pit closures. The resulting miners’ strike only hastened those pit closures, and by the mid-1980s over 3 million jobs had been lost in manufacturing, mining, and other traditional industries. These job losses were not spread uniformly throughout the land, they were concentrated in particular locations in the midlands and northern regions.

With so many traditional jobs wiped out, severe structural unemployment resulted with millions of workers finding that their skills were redundant, and non-transferable to other industries. That left those affected with a choice of either trying to build a new career from the bottom rung, or an unemployed life reliant on welfare payments. Whether it was a real choice or not, many ended up with the latter and, as a result, the social fabric of entire communities started to unravel.

Part of the problem was that lots of redundant workers became trapped in these geographical areas because, as the most skilled and talented people moved out for better job opportunities elsewhere, a glut of housing went up for sale/rent meaning that local house-prices fell sharply. Unwilling or unable to sell their homes at a loss, and with no prospects of gaining local employment at the old pay rates, short-term unemployment turned to long-term unemployment and worklessness.

As worklessness becomes ingrained in a community, children are born into poverty ridden households with no parents in work. Resentment against the authorities heats up as people lead a cat & mouse existence with the state i.e., you only qualify for welfare payments if you can show that you are actively seeking work, but if the work that is available will leave you with wages that are lower than your various welfare payments, then it isn't likely to be wanted.

This has been an ongoing issue for decades. It’s called the ‘welfare trap’, and it has been allowed to exist for too long. The welfare trap implies that anyone who takes a low-wage job is more or less guaranteed to end up with no significant financial reward once the lost welfare payments are taken into account. It’s a setup that destroys the efficient operation of the free-market, because no one wants to work for no reward.

As time passed, the intergenerational psychological effects on people took their toll.

Raised by a family in poverty and resentment, children performed poorly. School truancy levels rocketed and educational performance levels nosedived. Anti-social behavior, vandalism, and other petty crimes became commonplace. Drug use and drug dealing thrived. Teenage conception rates soared, with resulting increases in lone-parent families. The cycle of deprivation went from one generation to the next.

The Effects of Unemployment on Individuals

The reluctance to work without financial reward, and the cat & mouse game with the state over welfare payments, meant that a large proportion of the unemployed responded by heading to their doctors with 'back pain' or 'mental health issues'.

Whilst many of these illnesses may have been genuine, others were simply false claims aimed at evading the need to look for work. Welfare payments for the sick (called Incapacity Benefit at the time) were set at a higher rate than Unemployment Benefit, and it was much easier to game the system once eligible because Incapacity Benefit did not require recipients to seek employment.

Unfortunately, once acquired, a medical record of health problems would destroy any hopes of ever being recruited into a career that could replace the wages earned in the long defunct traditional industries, and an unemployed life on benefits ensued.

This is a typical scenario that plays out when a large proportion of jobs are lost in a tight geographical area, and over time the employability of the once productive labor force in that area can start to decline. Multiple barriers to employment start to develop that can further impede job prospects disproportionately for particular individuals/groups in society e.g., youth unemployment, over 50s unemployment, lone parent unemployment, disabled unemployment, and for low-skilled ‘NEET’ people i.e., those who are Not in Employment Education or Training.

Unemployment and Mental Health

If the original mental health claims from newly redundant workers had not always been entirely genuine, the long-term effects of worklessness certainly do take their toll on mental health. Job aspirations and motivation levels are usually the first mental aspects to deteriorate, and that invariable impacts negatively on ‘life chances’ and leads to a lower standard of living in the years thereafter.

Anxiety and depression also commonly results from the effects of unemployment, and especially so after a prolonged period of time. Furthermore, it tends to become a self-reinforcing problem, because it significantly reduces a person’s employability.

A Solution for the Unemployed Workers

Whilst government attempts to solve the problems of unemployment in deprived areas have failed to tackle the welfare trap problem, there have been many other ill-conceived and toothless projects that had stated aims of regenerating those deprived areas.

There is actually an entire industry, propagated by public-sector funding, that has existed for decades and made little to no difference in solving the root causes of long-term worklessness. This industry is, of course, highly lucrative for all the consultants and public-speakers who are engaged in it, but it is little more than a talking-shop with regard to effective solutions.

I don’t want to be too hard on the ‘professionals’ in the worklessness industry, because most of them do mean well. However, during my 7-years’ experience in this industry I never met anyone in a position of influence who:

  • had graduated in economics
  • had personal experience of working low-paid entry-level jobs
  • had themselves grown up in a deprived community

I can attest to all three, and I have no doubt about the main barrier-to-work:

It is a politically sensitive point, but basic common sense, that solving the welfare-trap is the only viable approach to overcoming the biggest obstacle to sustained employment growth. With this one major hurdle out of the way, the demand for work would significantly increase, and much higher employment rates would be likely to follow, whilst all the associated societal and personal costs of long-term unemployment would begin to fade.

And how do we remove the welfare trap?

By replacing the working-age welfare system with a Negative Income Tax (or a Universal Basic Income) and setting a sensible marginal tax rate such that anyone who takes a job will keep the majority of their salary. Far from causing unemployment (as many experts claim) this could, if set at sensible levels, make work far more rewarding and desirable in those communities where long-term unemployed workers need it the most.

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