Unemployment

The “misery index” of an economy refers to the sum of the unemployment rate and inflation rate. The inflation rate might hit zero or turn negative, but the unemployment rate will always be positive. Regardless of how rich a country is and how well the economy is doing, there will always be people out of work. The way in which unemployment affects the jobless depends upon several factors.

First, unemployment can be voluntary such as that resulting from people simply quitting their jobs, and these people may feel content with their joblessness. However, voluntary unemployment is not very common, accounting for less than 15 percent of the unemployed in the United States. Second, the duration of unemployment is relevant; the longer the period of unemployment, the greater the accrued distress and misery. Third, if the period of unemployment is transitory, such as in the case of laid-off automobile workers waiting for recall or United Airlines pilots on furlough, the prospect of reemployment reduces anxiety. Fourth, environmental factors may play a role; the more people are out of work in the neighborhood, the more bearable it is to be unemployed.

The economic cost of unemployment can be approached at both the macro and micro levels. At the macro level, the economic cost is measured by the loss of aggregate output. According to Arthur Okun’s Law, each percentage point that the actual unemployment rate exceeds the natural rate of unemployment leads to a 2.5 percent gross domestic product (GDP) gap, the difference between the potential and actual GDP. The resulting waste of human resources is one form of the economic inefficiency caused by unemployment. Other problems include (a) raising the fiscal burden leading to public budget deficits and possibly monetary instability and (b) increasing social costs caused by rising poverty, poor health, family and community breakdown, and crime.

At the micro level, the cost of unemployment is reflected in lost income, medical insurance, and other fringe benefits for those now unemployed. In addition, there are psychological costs for the unemployed as well as some negative externalities. While the former is the focus of this entry, the latter refers to the financial and psychological stress plus the pathological behavior (including child abuse) that the family members have to endure. The community at large might also feel the psychological pain of the unemployed, for example, in the threat from economic uncertainty and the prospect of crime and social unrest.

This article focuses on how unemployment affects health (physical and mental), a vital element of the worker’s productivity over the worker’s career. The next section describes various sources and types of unemployment and explains the factors behind lengthy periods of high unemployment, known as hysteresis. The third section discusses how unemployment affects mortality/morbidity and mental health. The fourth section reviews selective economic and social psychological theories of how unemployment affects health. The last session presents the conclusions.

Sources And Types Of Unemployment And Hysteresis

Unemployment arises from four sources: job loss and the end of temporary assignments (42 percent), quitting jobs (14 percent), reentrants to the labor force (36 percent), and new entrants to the labor force (8 percent). The percentages indicated in the parentheses refer to the relative importance of these individual sources in the United States in 1999. The causes of unemployment can be classified into three basic types: frictional, structural, and cyclical factors. Frictional unemployment, also called search unemployment, refers to people who are between jobs or just entering or reentering the labor market. Structural unemployment is joblessness due to the mismatch between workers’ skills and employers’ needs or to workers’ unwillingness to relocate. Cyclical unemployment arises from reductions in production over the business cycle.

While frictional employment may be voluntary and short term, structural unemployment tends to be involuntary and lasts longer due to the time involved in retraining. Cyclical unemployment reflects the extent of economic recessions and so is driven in the short term by the business cycle. The sum of frictional and structural unemployment is known as the natural rate of unemployment, which is determined primarily by long-term factors such as changes in demographics and economic structural and institutional variables.

Normally, the actual unemployment rate fluctuates around the natural rate over time. Sometimes a high level of unemployment may persist for a lengthy period (hysteresis) which, for example, Europe has experienced since the mid-1970s and which has eased off in some countries only recently. For instance, in 1994 the official unemployment rate of the European Union was 12 percent. Since 1981 the rate of unemployment has been at least 8 percent and on average 2 percent higher than the OECD average for all developed industrial countries.

The major causes of hysteresis include mismanagement of macroeconomic policies and lack of institutional flexibility. The former affects the extent of cyclical unemployment, while the latter influences the natural rate of unemployment. Valerie Symes claimed that tight monetary and fiscal contractions in the 1980s in most European Community countries rendered any expansionary strategy by individual economies impotent. The resulting demand shock reduced investor confidence and incapacitated the effective functioning of the labor markets. The institutional factors that contributed to the high natural rate of unemployment in Europe include duration of unemployment benefits, replacement ratio, expenditures on national manpower policies, union coverage, and bargaining by unions and employers.

The replacement ratio refers to gross benefits as a percentage of the most relevant gross wage. In 1985, the ratio was at least 70 percent in Denmark, Netherlands, Spain, Finland, Sweden, and Switzerland, as compared with 50 percent in the United States. The duration of unemployment benefits was indefinite in Belgium, Germany, Ireland, Netherlands, United Kingdom, Austria, and Finland, as compared with six months in the United States. Expenditure on manpower policies is money spent on placement and counseling, training, direct job creation, and recruitment subsidies. The expenditure per unemployed person as a percentage of output per person in 1987 was 2.4 percent in the United States as compared to a range of 2.7 percent-34.6 percent for European countries (with the exception of Italy and Spain).

Apparently the unemployed in most of Europe obtain much more generous unemployment benefits and other public support and for a longer duration than those in the United States. Furthermore, their powerful unions also provide strong protection for their members (so-called insiders) that results in wage rigidity and the insensitivity of wages to unemployment levels.

Unemployment, Mortality, And Mental Health

Over the past three decades, much of the work on unemployment and health has used two empirical methodologies: aggregate time-series data and panel or micro-level data. The time-series studies built on research by M. Harvey Brenner, which documented that increases in unemployment were associated with sizable increases in mortality (including suicide), mental health admissions, and crime. However, these aggregate studies have methodological pitfalls. Because of the long time span, it is necessary to control for possible improvements in health technology and health care that have taken place over the period. If this is not done properly, the uncontrolled variables can bias the results. Furthermore, the results can also be sensitive to the particular lag structure selected to explore the effects of unemployment.

Panel data, on the other hand, avoid the pitfall of the role of some uncontrolled variables. The technique analyzes changes in the dependent variable (e.g., mental health), thereby eliminating the potential bias from uncontrolled variables that are constant over time. For example, when examining cross-sectional data on labor force participants, Anders Bjorklund found that the unemployed have poorer mental health than the employed, even though the differences are rather small. He then used panel data to show that joblessness caused deterioration of mental health.

The association between unemployment and health (mental and physical) has long been recognized, but the critical question is whether the unemployment causes ill health or whether the ill health leads to unemployment. In general, the empirical findings about the causal relationship between unemployment and health are inconsistent. Overall there are three major qualifications that should be noted about the causal relationship between unemployment and health:

1. Overestimation of the impact of unemployment on health. Even though individual-level surveys have shown that the employed are healthier than the unemployed, there is a possibility that people who are in poor health may be more prone to become unemployed. I. P. Spruit reported that, before becoming unemployed, the unemployed had more often been sick on the job, more inclined to have work accidents, and more often changed jobs due to their health problems. In addition, individuals with poorer health may be more likely to remain unemployed. This selection problem may lead to overestimation of the impact of unemployment on social costs.
2. Job insecurity and health. In analyzing the effect of unemployment on psychological health, Brendan Burchell claimed that job insecurity rather than unemployment per se causes psychological stress. This conclusion was based on his empirical studies of the General Health Questionnaire (GHQ) scores of the employed and unemployed. One employed group, labeled as “male descenders,” had all experienced a job change in the past to a lower type job. They were more likely to have been unemployed, lacked job security, and were dissatisfied with their jobs. These male descenders had similar GHQ scores as those of the unemployed.
3. Recessions may be good for health. Recent empirical findings have claimed that some public health indices improve during recessions. Using longitudinal data from 50 states plus the District of Columbia for 1972-1991, Christopher Ruhm reported that state unemployment rates were negatively related to total mortality and 8 of 10 specific causes of fatalities, with suicide representing an important exception. Ruhm also employed microdata to show that consistently higher joblessness was associated with reduced smoking and obesity, increased physical activity, and improved diet.

Economic Approaches And Social Psychological Theories Of Mental Health And Unemployment

The mechanism by which unemployment affects health has been explored using two approaches: economic and social psychological.

Economic Approach To Unemployment And Health

While economists have recognized health as one component of human capital and have documented the link between human capital and individual earning capacity, the specific impact of unemployment on health has been somewhat neglected. However, the determination of health in home production may shed some light on the link between unemployment and health.

The idea is based on Michael Grossman’s formulation of the demand for health, which is derived from the way in which an individual consumer’s satisfaction with consuming health services and other commodities changes over time. As employment generates income, it facilitates the home production of gross investment in health, which in turn produces health services that give rise to the individual consumer’s satisfaction over time. Joblessness, on the other hand, reduces or interrupts the capacity of the unemployed to undertake gross investment in health. Thus, as a lesser amount of health services is produced from home production, the consumer’s satisfaction diminishes over time.

Social Psychological Theories Of Unemployment And Mental Health

After the dire experiences during the Great Depression in the 1930s, several social psychological theories were proposed to illuminate the way in which unemployment influences the mental health of individuals, including (1) the stages model, (2) Jahoda’s functional model, (3) Warr’s vitamin model, (4) agency theory, and (5) the status passage model.

1. The stages model. When becoming unemployed, in response to such a stressful event, people go through a progression of specific psychological stages. For instance, based on a large British survey of unemployed youth, J. Hill identified three stages in their response to joblessness: a period of optimism, followed by increasing stress, and finally a state of tolerance and depression.
2. Jahoda’s functional model. Marie Jahoda proposed that unemployment deprives an individual of the benefits associated with employment such as structured time, shared experiences with coworkers, provision of goals and purposes for life, personal status and identity, and enforcement of activity.
3. Warr’s vitamin model. Peter Warr proposed nine environmental factors analogous to vitamins that influence mental health, including opportunity for control, opportunity for skill use, externally generated goals, variety, environmental clarity, availability of money, physical security, opportunity for interpersonal contact, and valued social position. The central theme of this model is that a reduced level of these environmental vitamins results in a lower level of mental health. Unemployment will affect negatively these environmental vitamins and therefore the mental health of individuals.
4. Agency theory. Both Jahoda’s and Warr’s models focus on the benefits of work for the employed and fail to explore the link from the perspective of the unemployed. In agency theory, Burchell argues that the negative psychological consequence of joblessness is caused by its abrupt disruption to the individual’s plans and strategies rather than anything intrinsic to the work itself.
5. Status passage model. Status passage refers to individuals’ movement into different social structures that reflects changes in their identity, their social status with respect to one’s influence or power, and thereby their behavior. Applying this concept to interpret the impact of unemployment on the individual, Douglas Ezzy suggested that job loss leading to unemployment is a divestment passage that emphasizes separation from a status. The unemployed often face an extended transitional phase of uncertain duration, and the effects of this divestment passage result partly from the inability to maintain a consistent positive image about themselves, which is at the root of the eventual psychological disturbance observed in some studies.

Stage theory shows descriptively how the unemployed go through different psychological stages, but it does not explain why the emotions arise. Both Jahoda’s functional model and Warr’s vitamin model focus on the connection of work and the individual by emphasizing the social support and institutional setup that employment can provide, in addition to financial remuneration to individuals. However, there is lack of focus in both on the perspective of the unemployed.

Agency and status passage models share a basic theme that it is the interruption by unemployment of the strategies or plans that the unemployed have that causes the psychological distress. The major difference between the two models is that agency theory focuses on the impact of unemployment at a single point in time, while status passage emphasizes the dynamic transition experiences triggered by the shock of joblessness. Thus the status passage model offers an additional perspective on the connection between the individual and the external community.

Conclusion

Unemployment is always greater than zero in an economy, a reflection of the natural rate of unemployment. Thus there is always some segment of the population that is unemployed and faces unemployment problems. The impact of unemployment has been well researched since the Great Depression. Brenner was the first to document the direct association between unemployment and mortality, mental health admissions and crime. Later, both time-series and panel data were used to explore the causal link between unemployment and health. The major qualifications of link are the following: (a) the selection issue may cause an overestimation of social costs of unemployment, (b) the core of the causal relationship may lie in job insecurity rather than unemployment, and (c) recessions reduce mortality, especially certain types of fatalities.

While economics has recognized the economic cost of unemployment in the loss of aggregate output, it has rarely explored the effects of unemployment on mental health. The only theoretical framework that may shed light on the issue is the demand for health in which income is a means of purchasing inputs for the consumer’s home production of gross investment in health. Thus, unemployment results in less gross investment in health, thereby diminishing the consumer’s satisfaction over time.

Over the years, social psychologists have developed several theories explaining the path by which unemployment affects the mental health of the unemployed. These theories offer insights into the perspective of the unemployed and also how individuals are psychologically connected to work and the external environment. These insights should be taken into account when economists venture into this field to explore further how unemployment affects physical and mental health so that macroeconomic policy can be proposed, with supportive public programs that ease the financial, physical, and psychological stress that the unemployed, their families, and their communities experience.

See also:

• Careers and health
• Job loss

References:

1. Bjorklund, A. 1985. “Unemployment and Mental Health.” Journal of Human Resources 20:469-483.
2. Brenner, M. H. 1973. Mental Illness and the Economy.Cambridge, MA: Harvard University Press.
3. Brenner, M. H. 1979. “Mortality and National Economic.” Lancet 2:568-573.
4. Burchell, B. 1994. “The Effects of Labour Market Position, Job Insecurity, and Unemployment on Psychological Health.” Pp. 188-212 in Social Change and the Experience of Unemployment, edited by D. Gallie, C. Marsh and C. Vogler. Oxford, England: Oxford University Press.
5. Ezzy, D. 1993. “Unemployment and Mental Health.” Social Science Medicine 37:41-52.
6. Grossman, M. 1999. “The Human Capital Model of the Demand for Health.” Working Paper No. 7078. Cambridge, MA: National Bureau of Economic Research.
7. Hill, J. 1978. “The Psychological Impact of Unemployment.” New Society 43:118-120.
8. Jahoda M. 1981. “Work, Employment and Unemployment.” American Psychologist 36:184-191.
9. Ruhm, C. J. 2000. “Are Recessions Good for Your Health?” Quarterly Journal of Economics 115:617-650.
10. Spruit, I. P. 1989. “Vulnerability and Unemployment.” Pp. 135-164 in Unemployment, Poverty and Quality of Working Life, edited by B. Starrin, P. Svensson, and H. Wintersberger. Berlin, Germany: Edition Sigma Rainer Bohn Verlag.
11. Symes, V. 1995. Unemployment in Europe: Problems and Policies. London, England: Routledge.
12. Warr, P. 1987. Work, Unemployment and Mental Health.Oxford, England: Clarendon Press.