Long-term consequences of unemployment will have a ripple effect, causing income and net worth loss decades in the future
Since the start of the Great Recession in December 2007, the American economy has lost 8.7m jobs. While economic growth has resulted in the creation of more than five million new positions, that’s still almost three million short of the number of jobs needed.
All those missing jobs didn’t belong to numbers, however. They belonged to men and women. They are mothers and fathers, sisters and brothers, aunts and uncles, grandmothers and grandfathers.
And they are almost all people whose lives will likely be forever impacted by their bout of unemployment.
“The long-term impacts are going to be severe,” says Reid Cramer, director of the Asset Building Program at the New America Foundation. “I’m very concerned about people’s ability to stabilize their household balance sheets and rebuild their wealth.”
Unemployment, it turns out, is not a discrete event, a defined period of time with no other life impacts. Instead, it has a ripple effect, causing income and net worth loss decades in the future.
Think of it as a personal finance tragedy.
First, unemployment – surprise – has a way of reducing or wiping out people’s savings. More than 60% of the unemployed with employer-provided retirement accounts will tap into them for day-to-day living expenses. It’s likely they don’t have much of a choice. According to one study, African-Americans and Latinos are significantly more likely to turn to 401(k)s to make ends meet if they lose a job. Their households enjoy barely 5% of the net worth of white families.
So get a new job and replace the money? Well, not so fast. The new position is unlikely be the workplace equivalent of a comeback vehicle for an over-the-hill Hollywood star. Instead, you can think of an unemployed person as actor Gary Busey, going from The Buddy Holly Story to Celebrity Rehab and appearing in YouTube ads for Vitamin Water, seemingly taking on any role to collect a paycheck.
According to Brookings Institution, those who were able to find a new position were earning, on average, 17% less than they had in their previous jobs, even two years after beginning the new position. Other studies have found the impact goes on for even longer, finding a bout of unemployment during a recessionary period results in more than $100,000 in lost earnings over the course of a career.
Some of these long-term losses are likely caused by our changing economy. We’re churning out jobs that could generously be described as low-quality positions. The National Employment Law Project recently found the majority of new employment opportunities will pay $13.83 an hour or less. Yet the bulk of jobs lost during the Great Recession paid more than that, up to $21.13 an hour. Goodbye unionized auto plant worker, hello part-time retail clerk.
Children suffer from their parents’ unemployment too, and not just in the obvious way of growing up in a house with money shortages and instability. If your parent was unemployed in your youth, you might well earn less money in your adult life.
According to Phillip Oreopoulos, Marianne Page and Ann Huff Stevens, children of male steelworkers who lost their jobs in the 1980s downturn suffered a 9% earnings loss compared to peers whose dads remained employed. They were also more likely to have received unemployment benefits themselves, and often needed to turn to other social welfare programs.
Finally, one doesn’t have to be unemployed to suffer the impact of widespread unemployment. College students who graduate and begin their careers in periods where job loss is rampant will earn less money on graduation than their peers who begin professional lives in boom times. It will take some a decade to catch up. Others likely never will. As one paper on the topic put it, the long-term consequences are “large, negative and persistent”.
That could be said for almost everyone touched by unemployment. As Cramer put it: “Many of these households have a lot of hardship ahead of them”.