EconomyIssue 03 - 2023MAGAZINE
GBO_ Unemployment's influence

Unemployment’s influence on economy

Prolonged unemployment can lead to skills depletion and, in essence, deprive the economy of useful talent

Even while economists and scholars make compelling cases for why a certain natural amount of unemployment cannot be eliminated, experts asserted unemployment has a significant negative impact on the person, society, and the country as a whole. The unemployment rate can be interpreted in many ways depending on how it is calculated. In addition, underemployment can also be extremely detrimental to society’s economy. Unemployment figures include people who have low-paying or low-skill jobs that don’t provide enough full-time hours for benefits or a living wage.

Global and national emergencies can trigger both unemployment and underemployment. For example, when the COVID-19 pandemic hit, more than 10 million Americans were out of work in the first two weeks. The situation was so serious that the Coronavirus Aid, Relief, and Economic Security (CARES) Act extended unemployment benefits to self-supporting workers. Employed and part-time workers under Pandemic Emergency Unemployment Assistance and benefits provided for up to 39 weeks beginning on or after January 27, 2020 and ending on or before December 31, 2020.

Costs to the individual

The cost of unemployment to the individual is not difficult to imagine. When someone loses their job, it often has an immediate impact on their standard of living. Before the Great Recession, the average savings rate in the US had fallen towards (and sometimes below) zero. There are anecdotal reports that without a paying job, the average person is just weeks away from serious financial trouble.

Even those who qualify for unemployment benefits and other forms of government assistance find that this is not enough, as these benefits often replace only 50% or less of their regular income. This means that these people consume significantly less than usual. However, the economic consequences can go beyond merely reduced consumption. Many people turn to their retirement savings in times of need, and when those savings run out, there are long-term consequences.

Prolonged unemployment can lead to skills depletion and, in essence, deprive the economy of useful talent. At the same time, the experience of unemployment (either direct or indirect) can change the way workers plan for their future. Prolonged unemployment can lead to greater scepticism and pessimism.

Similarly, the lack of income from unemployment can force families to deny their children educational opportunities and deprive the economy of those future skills. Moreover, there are other costs for the individual. A study published in ResearchGate has shown that prolonged unemployment affects workers’ mental health and can worsen physical health, and shorten lifespans.

Costs to society

The social cost of unemployment is difficult to calculate, but no less real. When unemployment becomes a pervasive problem, calls for protectionism and severe immigration restrictions are often louder. Not only can protectionism lead to destructive retaliation between countries, but trade cuts also harm the economic well-being of all trading partners. Other societal costs include the way people interact with each other. Studies have shown that periods of increased unemployment can be associated with both less volunteering and higher crime.

Costs to the country

The economic cost of unemployment is likely to become more apparent when viewed through the lens of the state chequebook. Unemployment can result in higher payments from state and federal governments for unemployment benefits, food aid, and Medicaid.

Unemployment is also a dangerous condition for several economies. For example, almost 70% of what the US economy produces goes to private consumption and unemployed workers.

Even individuals who receive government assistance cannot spend as much as before. When those workers stop producing, the economy’s gross domestic product (GDP) declines and the nation veers away from the wise use of its resources. That is a significant problem for anyone who believes in Jean-Baptiste’s idea which says that the production of things generates its own demand.

It is also important to note that businesses suffer from rising unemployment. Taxes levied on corporations provide the majority of funding for unemployment benefits.

Unemployment estimate rate in 2023

In many countries, the COVID-19 pandemic, and the Russia-Ukraine war has exacerbated stalled labour market trends. It has also changed labour market conditions. South Africa is expected to have the highest unemployment rate in the world. As the most industrialized country on the continent, unemployment is estimated to reach 35.6% in 2025. Slow economic growth and tough labour laws have combined to discourage companies from hiring workers. Unemployment has hovered around 20% over the past two decades.

Bosnia and Herzegovina is estimated to have the highest unemployment rate in Europe at over 17%. It is followed by North Macedonia (15.0%) and Spain (12.7%). These unemployment rates are more than double the forecasts for advanced economies in Europe. The US unemployment rate is forecast to be 4.6%, which is 1.2% higher than current levels. This suggests that the current job market strength will weaken as US economic indicators weaken. One indicator is the Conference Board’s Leading Economic Index, which fell for the tenth straight month in December 2022. Lower manufacturing orders, falling consumer expectations and shorter work weeks are among the indicators being tracked. Like the US, many advanced countries are seeing labour market strength, particularly in the UK, Asia and Europe. However, it is unclear how long it will last.

Contrary to some of the declining economic indicators, the labour market is one of the strongest areas of the global economy. Even as the tech sector reports mass layoffs, US jobless claims fall below recent averages. (It’s worth noting that the tech sector accounts for just 4% of the workforce). Over 4.8 million jobs were created in 2022, more than double the average between 2015 and 2019. The recovery from the pandemic has impacted those numbers. Some analysts suspect companies are reluctant to lay off despite a bleak economic outlook. At the same time, the labour market is absorbing workers who have lost their jobs. Experts give an example of the manufacturing sector. They say, although the ISM purchasing managers’ index fell in January 2023, hitting 47.4 (a reading of 48.7 and below), this generally indicates a recession as factories are not shedding many workers. Instead, manufacturers are confident that conditions will improve in the second half of the year.

Also, strong labour markets are a key challenge for central banks around the world. This is because the resilient labour market is contributing to high inflation numbers. But despite recent rate hikes from central banks of several economies, the impact hasn’t triggered any major waves of unemployment yet in 2023. It typically takes around a year for monetary policy actions like this to have their maximum impact. Evidence shows that monetary policy needs more than three or even four years to combat inflation. The good news is that there may be other ways to contain inflation. Addressing supply-side dynamics, such as preventing supply shortages and improving transportation systems and infrastructure, could cool inflation. As investors closely monitor economic data, rising unemployment could coincide with higher interest rates, but no solution has yet been found.

Increase in global employment gap

According to a new ILO report, mutually reinforcing crises, including rising debt levels, are disproportionately hitting developing countries, widening the global employment gap between high and low-income countries and widening existing inequalities exacerbated by the COVID-19 pandemic. Global unemployment is expected to fall to 191 million below pre-pandemic levels in 2023, bringing the global unemployment rate to 5.3%. The report stated that estimates show low-income countries lagging far behind in the recovery process.

The ILO report believes low-income countries in Africa and the Arab world are unlikely to return to pre-pandemic levels this year. For North Africa, the unemployment rate in 2023 is projected to be 11.2% (10.9% in 2019); for Sub-Saharan Africa, 6.3% (5.7% in 2019); and for the Arab States 9.3% (8.7% in 2019). Other regions have managed to reduce their rates substantially below pre-crisis levels, with 6.7% in Latin America and the Caribbean (8% in 2019), 6.3% in Northern, Southern and Western Europe (7.0% in 2019), and 7.8% in central and Western Asia (9.2% in 2019).

Beyond unemployment rates, a new indicator developed by the ILO, the employment gap, provides a broader measure of unsatisfied demand for employment, particularly in developing countries. All who would like to work but do not have a job are recorded. Low-income countries have the largest employment gap at an alarming 21.5%, while the rate in middle-income countries is slightly over 11%. High-income countries have the lowest rates at 8.2%. In addition, low-income countries represent the only country-income group where the job gap rate has increased over the long term, from 19.1% in 2005 to 21.5% in 2023said.

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