Unemployment, the scourge of the 1930s is back – big time. For some time now newspaper columnists have been rather obviously avoiding the D Word – Depression.
There are some who argue that we can talk ourselves into a depression rather than a cyclical recession, there are others who say we are already there, but it will not become universally accepted for another 15 years, when historians and economists look back to 2008 as the beginning of the third depression.
The first two depressions started in 1873 and 1929, both after major banking and financial upheavals, exactly as happened in 2008.
The Economic Cycle
When times are improving businesses borrow money to invest at reasonable interest rates. Businesses build their stocks and industrial output increases. Unemployment will go down as factories take on more workers to increase production to feed the increasing demand of the higher numbers of the increasingly affluent working population.
After a time skill shortages begin to emerge, the growth part of the economic cycle slows down and hourly wage rates increase. This causes inflationary pressure on prices, governments increase interest rates so that people have less disposable income to spend on discretionary items like holidays, new computers and buying a better house, cutting demand for industrial goods and reducing inflation.
Factories start to lay people off because there is an excess of production over demand, unemployment starts to increase, wage rates fall as employers are in a stronger position with an increased labour pool to choose from.
When unemployment rises, governments cut interest rates to boost investment and job creation. After a time, when confidence is improving, businesses build their stock again… This is the economic cycle of boom and recession. During a recession unemployment increases.
Economic Effects of Unemployment
Unemployment is one tool that national governments use to balance their budgets and to control inflation. Governments have no direct control over unemployment, they can only control interest rates and money supply.
If interest rates increase, unemployment increases.
Unemployment is deflationary, it causes prices to decrease year on year, rather than their increasing year on year as they usually do. Economists are universally agreed that deflation is worse than inflation.
In a deflationary economy whatever you buy this year will be cheaper if you put it off and bought it next year instead. People put off purchase decisions and only buy things that are absolutely essential. Consumer demand falls, industrial production falls and unemployment rises, causing more deflation. This is why all economists and politicians are terrified of deflation.
Social Effects of Unemployment
Unemployment affects everyone. Those working in the private sector are more vulner
able to being made redundant, but even public sector employees will find that their conditions worsen, even, though their jobs are safe. Society tends to polarise, with those employed by the state in safe jobs on one side, and, on the other side, those in the private sector who live with the fear or the actuality of redundancy.
Some countries have a system in place whereby anyone being made redundant is given a lump sum, which may be related to how long that person was employed. The redundancy payment will cushion the financial impact of unemployment for a while, but will soon be used up to meet essential bills.
Countries that have a system of redundancy payments in place usually have a second system of regular payments to unemployed people. These payments are not made indefinitely, but for about a year. Further, means-tested, payments may be made for dependents and after the initial year's unemployment benefit payments have run out.
The shortage of money impacts on every aspect of the unemployed person's life. Mortgage and rent arrears are the most serious effect, but most families affected by unemployment will also experience an inability to pay fuel bills, to replace children's clothing and to pay bank loans and credit card bills.
Many people have redundancy insurance on bank loans and credit card debt, but the insurance only covers payments for the first year of unemployment. After that first year the bank will have no option but to agree to the rescheduling of the debt, whereby the debtor pays a smaller weekly amount, but for longer.
Credit ratings suffer and it may take years of paid employment before the damaged credit rating is restored to its previous sound basis. The family will be unable to find banks willing to lend money and unable to apply for credit cards.
Coping With Unemployment
If you have no job, your main focus is on finding another job, even if it means driving two hours to and from the job, or moving house. People will even emigrate to countries with better employment prospects. Nobody sits still.
Most job searching is done on the Internet, though there are still restaurants and retailers who put cards in their window advertising for new employees.
When unemployment is high, jobs are often not even advertised. An employer will ask employees if they know of anyone who would fit the vacancy. Networking becomes essential, both face-to-face and online. Most people who gain employment do so through their contacts rather than through adverts.
Most unemployed people have a routine. They still shave or put on make-up every day for self-respect. They still wear smart clothes when they go out. They get out of bed at the same time that they always did, eat a proper breakfast and prepare for the task of looking for a job. They check for local jobs at the same time every day. Routine is vital to avoid depression.
Relationships deteriorate following redundancy, too. Unemployment destroys a person's confidence and forces people into new roles in the family, destroying the family's equilibrium that has become established over many years. If the family has traditionally seen the unemployed parent as the breadwinner, then that individual's self-respect suffers. Sometimes the children's respect for the ex-breadwinner becomes less, and the other parent needs to try to counter this and to explain that it is not the other parent's fault..
Marriages are put under strain by the lack of money anyway, with the change in roles and relationships within the family it is easy to understand why divorce rates increase following unemployment