The Weekend Economists' Panglossian Pandemic January 20-22, 2012

[Demeter]

93. The costs of unemployment – again LEST WE FORGET

http://bilbo.economicoutlook.net/blog/?p=17740

One of the extraordinary things that arose in a recent discussion about whether employment guarantees are better than leaving workers unemployed was the assumption that the costs of unemployment are relatively low compared to having workers engaged in activities of varying degrees of productivity. Some of the discussion suggested that there were “microeconomic” costs involved in having to manage employment guarantee programs (bureaucracy, supervision, etc) which would negate the value of any such program. The implicit assumption was that the unemployed will generate zero productivity if they are engaged in employment programs. There has been a long debate in the economics about the relative costs of microeconomic inefficiency compared to macroeconomic inefficiency. The simple fact is that the losses arising from unemployment dwarfed by a considerable margin any microeconomic losses that might arise from inefficient use of resources. ...The daily losses from unemployment. In terms of estimates, not much has changed in the US economy over the last 2 years. The daily losses in income alone are enormous. One of the strong empirical results that emerge from the Great Depression is that the job relief programs that the various governments implemented to try to attenuate the massive rise in unemployment were very beneficial. At that time, it was realised that having workers locked out of the production process because there were not enough private jobs being generated was not only irrational in terms of lost income but also caused society additional problems, such as rising crime rates. Direct job creation was a very effective way of attenuating these costs while the private sector regained its optimism. In fact, it took about 50 years or so for governments to abandon this way of thinking. Now we tolerate high levels of unemployment without a clear understanding of the magnitude of costs that that policy position imposes on specific individuals and society in general.

The single most rational thing a government could do was to ensure that there were enough jobs to match the available labour force....It is well documented that sustained unemployment imposes significant economic, personal and social costs that include:

• loss of current output;
  
• social exclusion and the loss of freedom;
  
• skill loss;
  
• psychological harm, including increased suicide rate (which I will return to later);
  
• ill health and reduced life expectancy;
  
• loss of motivation;
  
• the undermining of human relations and family life;
  
• racial and gender inequality; and
  
• loss of social values and responsibility.

We know that the losses encountered during a prolonged recession reverberate into tortured recoveries and that the damage that unemployment causes spans the generations. Even before the crisis hit, these costs in most countries were huge as policy makers began using unemployment as a policy tool rather than a policy target as the obsession with inflation-targetting took hold. Most people do not consider the irretrievable nature of these losses. Every day that unemployment remains above the full employment level (allowing for a small unemployment rate arising from frictions – people moving in-between jobs) the economy is foregoing billions in lost output and national income that is never recovered. The magnitude of these losses and the fact that most commentators and policy makers prefer unemployment to direct job creation, shows the powerful hold that neo-liberal thinking has had on policy makers. How is it rational to tolerate these massive losses which span generations? Neo-liberalism has also changed the way we think about unemployment. In the past we understood clearly that it arose as a result of a shortage of jobs. However, in recent decades, we have been conditioned by a relentless (lying) press and government statements to perceive unemployment as an individual problem. So the unemployed are type-cast as being lazy; having poor work attitudes; refusing to invest in appropriate skills; and subject to disincentives arising from misguided government welfare support, and all the rest of the arguments that mainstream uses to obfuscate the social problem. The focus in the public debate is to “blame the victim” and suggest that most are unemployable and prefer to live on welfare, where that support is available. The overwhelming evidence from the informed research literature is that almost all the unemployed (when surveyed) prefer to work and are willing to take work if offered. The overwhelming evidence from studies in most countries suggests that the unemployed are highly motivated to find work and are victims of a shortage of jobs rather than personal/individual deficiencies. The dominance of the neo-liberal ideology led governments in most countries to have eschew the adoption of policies of direct job creation to reduce the rate of unemployment and to minimise these massive costs. Fiscal policy has became geared to the achievement of budget surpluses as some sort of token of prudent financial management.

NUMBER CRUNCHING ENSUES---SEE LINK

Conclusion

Even under conservative assumptions, the economic and social costs of sustained high unemployment are extremely high. The inability of unemployed individuals and their families to function in the market economy gives rise to many forms of social dysfunction, in addition to output loss. The apparent failure of neo-liberal supply side policies to reduce unemployment prior to the crisis is now highlighted during the crisis. There is now an urgent need to address the large pools of unemployment in world economies. The daily income losses alone are enormous and overwhelm other inefficiencies notwithstanding the productivity heterogeneity that exists across the workforce. There is no financial reason why the government should not deal with this problem directly by introducing a Job Guarantee as a starting point. Then broader investment in public infrastructure could follow according to political preferences. If the Government had the political will, it could readily overcome the problem of persistently high unemployment.