Unit 4 Macro: Unemployment Scarring Effects

In the past we have discussed some of the long term economic and social costs of a persistently high rate of unemployment and we have used the term hysteresis effects. It seems that a new term is being used to cover some of the consequences of millions of people being out of work - unemployment scarring - and this revision blog looks at some of the causes of this.

The basic idea behind unemployment scarring is that higher unemployment brings higher unemployment - an economy that is unable to create sufficient new jobs can end up with a permanently higher jobless rate and slower productivity growth and increased welfare dependency.

Rising long-term unemployment may cause some people to stop their active search for work and effectively leave the labour market. This can be inflationary for the UK because it means that wage inflation might start to accelerate at a higher rate of unemployment.

The latest unemployment data for the European Union has just been published. The jobless rate for February 2012 in Spain was 23.6% of the labour force, 21% in Greece, 15% in Portugal, 10% in France, 8.7% in the UK but only 5.7% in Germany. The seventeen country euro zone unemployment rate edged up to 10.8pc in February - the highest level since the Euro was first introduced. This means more than 17m people are now out of work in the single currency area.

5.462 million young persons (under 25) were unemployed in the EU27, of whom 3.272 million were in the euro area. The EU youth unemployment rate was 22.4%, with the lowest rate in Germany (8.2%) and the highest in Spain (50.5%) and Greece (50.4% in December 2011).

More reading on unemployment scarring here

Scotsman: Susan Watt: A generation is being scarred by lack of jobs

Chris Dillow: Unemployment scarring and well-being

Unemployment set to remain high in OECD countries in 2013