What the Lower Unemployment Rate Really Means for the Economy

By Luigi Wewege Friday, June 19, 2020

The unemployment rate dropped to 13.3% in May, bringing some long overdue good news regarding the desperate state of jobs in the US. It also brings good news for the US economy as a whole.

The link between unemployment and the economy is a well-researched one, and finding proof of actual causation can be challenging. This article aims to give readers a more in-depth perspective on the links between recession and unemployment and how this affects our picture of the US economy.

Identifying Current Unemployment Trends

Unemployment tends to rise quickly, and often remains elevated, during times of recession. Recent reports suggest that the US is officially in a recession that could have started as early as February, and it is unknown how long it will last.

During times of recession, companies face increased costs, their revenue begins to fall, and some face increased pressure to repay their debts. This slump can help explain why over 100,000 small businesses have permanently closed during this pandemic. Many companies are forced to lay off workers in order to cut costs. The number of unemployed workers across many industries spikes simultaneously, newly unemployed workers find it difficult to find new jobs during the recession, and the average length of unemployment for workers increases.

What’s concerning is that trends that were expected to take a decade to become fully realized have done so in just ten weeks. Many stores have quickly ramped up automated checkouts and online ordering with in-store pickup, both of which reduce jobs for retail salespeople and cashiers.

That's a big deal -- these are two of the most common occupations in the US, which employ almost eight million people. Some of these jobs will be restored, but not at the same levels as before. In economic terms, capital is replacing labor. Companies will not give up the technological capacities they are building during the crisis, and consumers will not give up many of the additional conveniences provided by the digital economy.

Costs to Society

The social costs of unemployment are difficult to calculate. When unemployment becomes a concurrent issue, there are often increased calls for protectionism and severe immigration restrictions. Regardless of individual political opinion, it would be unreasonable to argue that these calls don’t have an effect on the US economy.

At the moment, these decisions have in large part been both difficult and easy to make. International trade has recently taken a massive hit, leaving observers interested in what will happen once everything returns back to “normal.”

Other social costs include how people interact with each other. It is often assumed that eras of high unemployment rates will naturally lead to higher levels of crime. However, some studies on the topic find that the opposite can be true. As Ohio State University economist Bruce Weinberg noted in 2009, “People sitting in their houses don’t make great targets for crime...People going out spending cash and hanging out in big crowds do.”

Final Thoughts

Governments are right to be concerned and fret about the consequences of inflation, but unemployment is likewise a serious issue. Apart from the social unrest and disgruntlement that unemployment can produce in the electorate, high unemployment can have a self-perpetuating negative impact on businesses and the economic health of the country.

This current moment in history should be viewed as a time when we can actually influence catalysts to build a future that is best for society.

About the Author

Luigi Wewege

Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.

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