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Professor Geraint Johnes
Professor of Economics at Lancaster University
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Professor Geraint Johnes

July's Director's report

Authors: Professor Geraint Johnes

15 July 2014

Unemployment scars people. This has been known for a long time, as has the importance of this for macroeconomic policy. If, as a result of a temporary downturn in the economy, more people become unemployed, then, as the economy recovers, these people will find it relatively difficult to regain employment. That means that what ought to be just temporary blips in unemployment develop a more permanent component. This phenomenon is known as hysteresis.

Two recent events at The Work Foundation have thrown the question of unemployment hysteresis into sharp relief. The first was the launch of our new report, ‘Sick of Being Unemployed’. This investigates the interplay between episodes of unemployment and ill health amongst men. Unemployment is a stressful experience, and it is perhaps not surprising that it can lead to mental health problems. It can also, in consequence, result in behaviours that lead to physical health problems – illnesses associated with smoking, drinking, or a sedentary lifestyle. Once their health suffers, the unemployed face a double whammy – sick unemployed people are particularly unlikely to find their way back into work. So unemployment becomes hysteretic. Our report focuses on men, because the evidence suggests that men are less capable than women in coping with unemployment – or at least they are less able to insulate health from their labour market misfortunes. Managing the return to work for men who have suffered ill health is particularly important because work can contribute to their recovery. At the macroeconomic level, if we can manage more people back into work, we can both raise output in the short term and break the vicious circle that hysteresis represents.

Some (relatively) good news is that the Great Recession (in the UK) did not result in a massive increase in overall unemployment. While this is reassuring to some extent, when we drill down to more detailed figures, there remains cause for concern about the longer term legacy of the experience of the last few years. Youth unemployment did rise markedly during the recession, resulting in over a million young people being out of work. We have analysed this phenomenon in some detail at The Work Foundation.

The second of our recent events was a seminar on young people and the recovery. This included the presentation of a paper by Mark Bryan and Alberto Tumino which documents the long term scarring effects of unemployment on young people. Particularly striking is the fact that the scarring appears to be deeper if young people first enter the labour market during times of recession.

Does this mean that the damage is already done? Have we lost a generation of young people? Not necessarily. But it does mean that that generation will need unusual support to help them face the challenge of first entering employment and then living up to their full potential. Apprenticeships help – but they need both to target the right people and to provide continuing support. Monitoring, and responding effectively to the needs of, those currently in their early to mid-twenties will be a crucial investment. The penalty for getting it wrong is unfulfilled lives and a huge loss of potential output.