The Tragedy of Unemployment

• Author: Mai Chi Dao and Prakash Loungani
• Position: an Economist and is an Advisor, both in the IMF's Research Department.

THE world faces an unemployment crisis. Across the globe, an estimated 210 million people are unemployed, an increase of more than 30 million since 2007. Three-fourths of this increase has occurred in the advanced economies. The problem is particularly severe in the United States—the epicenter of the Great Recession and the country with the highest increase in the number of unemployed people. There are 7.5 million more people unemployed today than in 2007. And while the U.S. recession has been declared to have ended in June 2009, evidence from the past couple of recoveries shows that employment has taken quite a bit longer to recover than incomes (see Chart 1).

The so-called misery index, the sum
of the inflation and unemployment rates,
is now almost totally dominated by joblessness (see box). The human toll of the slow recovery in jobs in the United States and elsewhere could be very high. Studies have demonstrated that the
costs to the unemployed include a persistent loss in earnings through career downgrading, reduced life expectancy,
and lower academic achievement and earnings for their children. These costs
are greater for those who have been unemployed longer.

There are many facets to joblessness. This article will look at

• the human cost of unemployment and how governments’ policy responses during the Great Recession kept it from being even bigger;

• near-term policies to aid labor market recovery; and

• the challenge posed by the high level of long-term unemployment.

Human cost of unemployment

Research on the effects of past recessions gives us a good idea of the often high and persistent cost of unemployment for individuals and their families (see Dao and Loungani, 2010, for a survey).

Layoffs are associated with loss of earnings not just during the jobless episode but far into the future (see Sullivan and von Wachter, 2009). The losses are higher if the unemployment occurs during a recession. Studies of the United States and Europe show that even 15 to 20 years after a job loss during a recession, earnings of those who lost their jobs are 20 percent lower than those of comparable workers who kept their jobs. The adverse effects on lifetime earnings are most pronounced for unemployment episodes experienced by young people, especially following college graduation. In a recession, young workers tend to take worse jobs than they would during better times. And as they settle into family life and become less mobile, it is hard to recover from this “cyclical downgrading.”

There is persistent and large loss of earnings in other countries as well—Germany, for example—and it is of similar magnitude. As the German example shows, even in countries with more generous welfare systems and lower earnings inequality than in the United States, workers are not shielded from lifetime earnings losses caused by job displacement.

The human toll is not limited to monetary losses: layoffs may also be associated with loss of health and life, according to recent studies. To rule out spurious associations—unhealthy individuals may, for example, be less productive and thus more likely to become unemployed—and other confounding factors, the studies use data sets that allow researchers to control for preexisting health, socioeconomic, family, and other background characteristics as well as the timing of health and...