The psychological and cultural toll of high unemployment
Both longitudinal and cross-section evidence suggests that the drop in individual happiness associated with unemployment is smaller in countries and regions where the average unemployment rate is high. In other words, massive and persistently high local unemployment seems to take some of the sting out of being unemployed. In a low-unemployment environment, the unemployed may feel more isolated in their suffering. If unemployment is more widespread, more peers may share an unemployed worker’s pain, lessening the psychological burden of living without paid work. For some of the unemployed, one side effect of the reduced psychological burden is that they devote less effort to finding another job. When reduced job-search effort results in slower re-employment, high joblessness can become to some degree self-perpetuating.
Thus, massive and persistent unemployment, by modestly reducing the psychological toll of joblessness, may indirectly create an environment in which long-term unemployment spells become more palatable and common. At the moment, U.S. unemployment is abnormally high as a result of fallout from a financial crisis and the massive loss of housing wealth. There is too little demand for goods and services produced in the United States to employ all the adults willing to work at the going wage. If high unemployment persists, the search behavior of the unemployed may change and make it more difficult to attain the full-employment unemployment rate we enjoyed in the middle of the last decade.