In the last post, I mentioned some negative effects from unemployment on individuals, households, and society. To be more specific, these costs can be broken down into three major categories:
Economic Costs:
In terms of the entire economic system, unemployed resources result in a loss of output (real GDP), income, and talent. The output/income gap (difference between actual GDP and full-employment GDP) widens as unemployment rises --- recall Okun's Law.
Social Costs:
An indirect effect of unemployment is represented by the poverty rate, the crime rate, the murder rate, the suicide rate, the divorce rate, the admission rate to mental hospitals, etc., all of which have been shown to be positively correlated with the unemployment rate.
Individual & Household Costs:
Idle resources can always be put back to work lowering the output gap, but for the individual, the loss is much more damaging and long-lasting. It's not just income, or confidence that's sacrificed, but valuable work experience! On average, the experience* that's foregone while the individual is idle or even underemployed will never be recovered.
* Another way of thinking about this foregone experience is that the opportunity cost of unemployment represents the loss of one's potential human capital investment.
Idle resources can always be put back to work lowering the output gap, but for the individual, the loss is much more damaging and long-lasting. It's not just income, or confidence that's sacrificed, but valuable work experience! On average, the experience* that's foregone while the individual is idle or even underemployed will never be recovered.
* Another way of thinking about this foregone experience is that the opportunity cost of unemployment represents the loss of one's potential human capital investment.