In general, when we say there is unemployment is an economy,
the reference is not to voluntary but involuntary unemployment. In other words,
the unemployment rate captures that fraction of unemployment that is above the
natural rate. If 12% of the labor force is unemployed and the natural rate of
unemployment in the economy is known to be 5% for example, it follows that the
unemployment rate is (12-5) 7%. This reflects the amount of unemployment that
is involuntary and should be the immediate concern of government and policy
makers. Involuntary, cyclical or demand deficit unemployment implies that
persons are willing to work at the prevailing wage rate but are not able to get
jobs because of the level of the economic activities. Such unemployment places
a heavy cost on the society. The cost of unemployment can be divided into two:
the economic costs and the social or psychological costs. We will examine each
of these in brief.
the reference is not to voluntary but involuntary unemployment. In other words,
the unemployment rate captures that fraction of unemployment that is above the
natural rate. If 12% of the labor force is unemployed and the natural rate of
unemployment in the economy is known to be 5% for example, it follows that the
unemployment rate is (12-5) 7%. This reflects the amount of unemployment that
is involuntary and should be the immediate concern of government and policy
makers. Involuntary, cyclical or demand deficit unemployment implies that
persons are willing to work at the prevailing wage rate but are not able to get
jobs because of the level of the economic activities. Such unemployment places
a heavy cost on the society. The cost of unemployment can be divided into two:
the economic costs and the social or psychological costs. We will examine each
of these in brief.
Economic costs
The economic costs of unemployment can be measured by
considering either the loss of output to the economy or the loss of income to
the factors of production. Whenever unemployment rises beyond the natural rate,
actual GDP falls below to potential level. Economists call this sacrificed
output (sacrificed, as it were, to unemployment) the GDP gap. Empirical studies
carried out by Arthur Okun for the U.S. economy showed that for every
one-percentage point increase in unemployment rate, there is a three percent
drop in real GDP. This finding later came to be known as Okun’s law. Okun’s law
measures the short-run losses of output due to a cyclical increase in the
unemployment rate.
considering either the loss of output to the economy or the loss of income to
the factors of production. Whenever unemployment rises beyond the natural rate,
actual GDP falls below to potential level. Economists call this sacrificed
output (sacrificed, as it were, to unemployment) the GDP gap. Empirical studies
carried out by Arthur Okun for the U.S. economy showed that for every
one-percentage point increase in unemployment rate, there is a three percent
drop in real GDP. This finding later came to be known as Okun’s law. Okun’s law
measures the short-run losses of output due to a cyclical increase in the
unemployment rate.
Non-economic (social and psychological) costs
For the individual, involuntary unemployment imposes a great
psychological cost. Some cases of suicide, homicide, cardiovascular mortality
and mental illness have been empirically linked to high unemployment. As opined
by Reuses (1964)5
psychological cost. Some cases of suicide, homicide, cardiovascular mortality
and mental illness have been empirically linked to high unemployment. As opined
by Reuses (1964)5
A job gives hope for material and social advance. It is a
way of providing one’s children a better start in life. It may mean the only
honorable way of escape from the poverty of one’s parents, it helps to overcome
racial and other social barriers. In short, a job is the passport to freedom
and to a better life. To deprive people of job is to rid them out of society.
To the society at large, high unemployment rates lead to increases in crime,
especially among youths, social disorders and can lead to disintegration of
family units. In fact, high unemployment can lead to rapid and violent social
and political changes from which it may take a long time to recover.
way of providing one’s children a better start in life. It may mean the only
honorable way of escape from the poverty of one’s parents, it helps to overcome
racial and other social barriers. In short, a job is the passport to freedom
and to a better life. To deprive people of job is to rid them out of society.
To the society at large, high unemployment rates lead to increases in crime,
especially among youths, social disorders and can lead to disintegration of
family units. In fact, high unemployment can lead to rapid and violent social
and political changes from which it may take a long time to recover.
