The real cost of unemployment

The long term effects of unemployment on the individual go beyond the need for money. The loss of self-esteem, identity and social contact have led to a series of protests across Tunisia, Egypt and elsewhere


Economists calculate the costs of unemployment to society in terms of the amount of aggregate income that is foregone because of resources left idle. That is a worrying number right now. Figures just released by the International Labour Organisation show the number of unemployed globally in 2010 stood at 205 million, virtually unchanged from the previous year, and 27.6 million more than the 2007 number.

Unlike other economic inputs, however, human resources do not like to be left idle. A wave of unrest, sparked mainly by the destructive cocktail of unemployment and rising prices, has been sweeping the globe since the financial crisis hit in 2008.

In Europe, demonstrators took to the streets to vent their anger in Britain, Ireland, Greece, Spain, Portugal and France, and several incumbent governments have now been voted out of power by frustrated citizens.
Halfway around the world, trade unions have been marching through the streets of New Delhi to protest against high food prices and unemployment in the run up to elections in India. In some of the world’s newer democracies where extreme cultural interests are delicately balanced, these types of demonstrations may present flashpoints to something more violent; a recent demonstration against unemployment in a fervently Muslim area of Azerbaijan is a good example.

There have been demonstrations in Algeria, Bahrain, Egypt, Iraq, Jordan, Libya, and Morocco, with citizens daring to call for regime change despite the possibility of repression. The governments of Tunisia and Egypt have fallen, while in Libya Colonel Gadaffi is fighting to hold on to power. The remaining rulers in the area are reviewing their options for retaining control, but what can governments do to deal with a problem that is global as well as local?

Some are trying to calm jittery nerves by giving people money. The Kuwaiti ruler recently announced a gift equivalent to $3,559 plus free food coupons to be given to each of the country’s one million citizens (but not its 2.2m foreign workers). The king of Bahrain awarded $2,650 to his agitating subjects, while the king of Saudi Arabia announced a package of handouts worth an estimated $37bn to improve social housing and welfare in an attempt to sideline calls for protests.

But the long term effects of unemployment on the individual go beyond the need for money. The loss of self-esteem, identity and social contact can quickly descend into depression, when life itself loses its value. Several cases of self-immolation highlight the point and show its dangers. It was an act of self-immolation by a young unemployed man who could not support his family that sparked the protests in Tunisia in January.

Following his death, several similar cases were reported in Algeria, Egypt, Iraq and Mauritania.

So money alone is not a cure. As a blogger in Saudi Arabia wrote in response to the king’s package of giveaways, “People don’t revolt because they are hungry. People revolt because they want their dignity.”
The trouble is, governments dealing with unsustainably high budget deficits are looking to reduce costs, which inevitably means cutting, not creating jobs. Many are also seeking longer term budget relief through public sector pay freezes and changes to public sector pension entitlements. Greece, Spain, Latvia and Lithuania went one step further, implementing highly unpopular, but necessary, wage cuts.

What is worrying the labour movement across Europe is the creeping loss of generous terms won from employers over the last 50 years. Like several other countries, France is moving to raise the age of retirement by two years to 67. Several countries are cutting unemployment benefit entitlements and even Germany, with the healthiest economy in the Eurozone, is reducing support for the long term unemployed and stay-at-home parents. 

By the end of 2010, the struggling Greek government was proposing labour legislation that would allow employers to pay lower rates than those set in their private sector collective agreements. Despite heavy opposition, Prime Minister George Papandreou remained determined. “We either save jobs, or businesses will close and more people will be out of work,” he said.

The hope of many governments as they shed the public sector fat that has accumulated over many years, is that an expanding private sector will be able to absorb the surplus labour, but that may not always be possible. Without the ability to devalue their currencies, some of the smaller members of the Eurozone are struggling to boost the competitiveness of their products in export markets.

In Cuba, that bombastic communist thorn in the flesh of the mighty USA, the economic crisis might just have accomplished what the threat of invasion never did.  Faced with the need to shed up to one million jobs, representing 20 percent of his workforce, President Raul Castro is relaxing laws on private enterprise, allowing foreign businesses to operate alongside state cooperatives and encouraging workers to set up their own small ventures.

All of these measures will take time to translate into the creation of new jobs, and yet it seems that no one expects employment to bounce back to pre-crisis levels. In its report, Global Employment Trends 2011, the International Labour Organisation (ILO) points out that despite signs of economic recovery – the global economy grew by 4.8 percent in 2010 – there has not been a corresponding recovery in the jobs market. That raises a question about the value of the jobs that were lost. Tyler Cowen and Jayme Lenke of George Mason University in the US coined the term, “zero marginal product workers” to describe workers whose productivity may have been lower than the cost of hiring, training and insuring them, suggesting that many of the jobs lost in the recent recession were non-jobs to begin with. 

One thing is certain: for people currently out of work and struggling to make ends meet, the job market is going to become a lot more competitive and there will be many losers. Of particular concern to economists and politicians is the high level of youth unemployment around the world. ILO estimates that in 2010, 77.7m young people were unemployed across the 56 countries for which data is available, but a further 1.7m young people have simply given up and removed themselves from the labour market. They are the dangerous ones.
Those that continue the job hunt will have to become more flexible. Any lucky enough to be mobile, will find pockets of rapid job creation in places like Germany, South America and Asia. Others will have to develop new skills or use existing skills in new ways. According to a survey by the Pew Research Centre, nearly 70 percent of unemployed workers in the US have already looked outside their career or job-field choice, or are considering doing so.

For far too many, however, like Jaime Cadena, a 44 year old construction worker laid off when the property bubble collapsed in Barcelona, these options may not be available. During the boom times, a bank encouraged him to take a 100 percent mortgage, which he later discovered had an increasing payments schedule built in to the fine print. Now, in the context of a 20 percent unemployment rate and drastic cuts to the state welfare system, Cadena faces losing his home but retaining the debt, with little prospect of a good job in sight. “It’s like a terrible weight I’m forced to carry,” he told Toronto’s Globe and Mail. “I feel like the whole country’s problems have fallen on my back.”