Alex Harowell has an interesting post about the economics of unemployment at AFOE.
In a strong economy, career paths tend to stay within a specialism, developing increasing experience and skill, and hence steadily increasing productivity. Or if somebody switches careers, it’s more a case of reculer pour mieux sauter, taking a temporary setback to end up somewhere more productive.
That doesn’t work in a recession. People who lose their jobs in bad circumstances are more willing to accept a new one, even with much worse pay and prospects.
In the long term, this is often a Bad Thing, both for them and the economy. They get onto a different career path, one coming more from desperation than choice, and will find it hard to switch back:
The unemployed are suddenly driven off their optimal productivity path, and are usually under pressure to take any job that comes along, no matter how suboptimal. Until they get back to where they were before the crisis, on their new paths or on their old ones, the economy will forego the difference between their potential and actual production.
The long-term cost of this depends on how desperate the unemployed are to take just any job that comes along. It’s better for the economy if they stay unemployed for a while before returning to a high-productivity career, rather than getting locked long-term into something less productive.
i.e. it all depends how society treats the unemployed. If you cut benefits, treat the unemployed like shit, and hussle them into whatever job is available (UK), you set the country up for long-term under-productivity:
If the unemployed sit it out and look for something better, you would expect a jobless recovery and then a productivity boom – like the US in the 1990s. If the unemployed take the first job-like position that comes along, you would expect a jobs miracle with terrible productivity growth, flat to falling wages, and a long period of foregone GDP growth. Like the UK in the 2010s. And if your labour market institutions are designed to prevent the information destruction in the first place, with a fallback to Keynesian reflation if that doesn’t cut it? Well, that sounds like Germany in the 2010s.
* lets ignore the fact that people may choose lower-paid (i.e. less productive) work for non-monetary reasons. Everything else works out much the same