Economic and Social Impact of a Recession

by Errol Allen 08.Jan.10

The global economic crisis has led to a dramatic increase in the number of persons joining the ranks of the unemployed around the world. Some of the likely costs of unemployment for society include increased poverty, crime, mental health problems and diminished health standards.{{more}} Understanding the forces that create unemployment and trying to mitigate their negative effects to the greatest extent possible, is a central issue in economic policy. Joblessness can hit individuals hard. Lacking a job often means lacking social contact with fellow employees, lack of self-esteem, mental stress and illness, and of course the ability to pay bills and to purchase necessities.

Recession-generated unemployment makes employed workers more insecure in their jobs as they worry about being replaced. This fear of job loss can lead to psychological anxiety. For any economy, high unemployment implies low real Gross Domestic product: we are not optimizing the use of our resources and are thus wasting opportunities to produce goods and services that allow people to survive and enjoy life. For the United States, it has been estimated that as unemployment rises by one percentage point, say from 7% to 8% of the labour force, the percentage of potential output that could have been produced but was not, rises by about two points. A question that is often posed is the following; Wouldn’t a high unemployment rate delay the recovery to our current recession? Not really. The reason is, the economy has some self-correcting features in it. Consumer spending is one such feature. The fall in consumer spending tends to be disproportionate to the decline in income. That is to say most of the decline is often due to employed people being concerned about their position in the job market and therefore reducing expenditure rather than the effect of those persons who become unemployed. When the employed people realize that they have avoided being laid off, they start spending. So the key factor isn’t so much the behaviour of the people out of work, but the bahaviour of people who still have their jobs.

Inventories (stocks of goods) also help to correct the economy. When businesses cut back on their inventories, they force producers to cut back on their output. It is also a fact that the unemployment rate is a lagging indicator, meaning that it starts to improve only after the overall economy is already improving. As such, unemployment itself does not therefore prevent the economy from improving. Unemployment however, produces other negative effects. Distressing new research shows that unemployment fosters social isolation not just for the unemployed but also for their still employed neighbours. Moreover negative consequences last much longer than unemployment itself. Policy makers have focused on short term help for the jobless, but they need also to address these longer term community effects.

Unemployed persons tend to be significantly less involved in their communities than their employed counterparts. The jobless are less likely to vote or to do voluntary work. They attend fewer meetings and serve less frequently as leaders in local organizations. They also tend to spend most of their free times alone. These negative social consequences outlast the unemployment itself. Unlike almost any other traumatic event, joblessness results in permanently lower levels of life satisfaction even after the jobless later find jobs. What seems to explain the civic withdrawal of persons during a recession is the fact that the jobless shun socializing, shamed that their work was deemed expendable. The unemployed may feel that the employer has broken an implicit social contract, deflating any impulse to help others.

These lasting social consequences of unemployment demand remedial actions. In the more developed countries, special aid is extended to communities with high and persistent unemployment. In poorer countries like our own, we also need to be mindful of the negative social consequences that the current recession may foster and find creative solutions that could bring about relief to the most seriously affected persons in our communities.