The costs of unemployment, particularly repeated unemployment, are much higher than the
immediate loss of earnings. According to new research published in the Economic Journal, the
experience of unemployment inflicts longer-term 'scars': both the increased likelihood of future
unemployment and lower subsequent earnings in employment. These findings not only provide
support for policies that will reduce unemployment; they also point up the need to include these
future effects in any assessment of the costs of unemployment and equally in the evaluation of
programmes to reduce it.
The symposium of three papers - by Wiji Arulampalam, Paul Gregg, and Mary Gregory and
Robert Jukes - suggests that redundancy ranks behind only bereavement and divorce as a lifedisrupting
event. Even once the immediate trauma is past, the damage persists. Unemployment
tends to bring with it future unemployment; and job displacement tends to be followed by a lower
trajectory for future earnings.
What is more, the researchers suggest, these two effects may well be related, with lower earnings
potential leading to an extended period of job search before a suitable job match is found or the
person drifts into economic inactivity. Together, the scarring effects of unemployment will be
particularly damaging in exacerbating lifetime inequality, bringing the threat of poverty and social
exclusion.
The three studies use longitudinal surveys and administrative data to address the issue of the
scarring effects of unemployment by tracking the individual labour market experiences of large
numbers of British men over the 1980s and 1990s. Datasets available for Britain provide
exceptionally suitable test-beds for this kind of analysis.
Wage Scars
The studies find evidence of significant wage penalties arising from employment interruptions.
Arulampalam's paper, which analyses data from the British Household Panel Survey, suggests that
the wage penalty attached to a spell of unemployment after re-entry takes an inverted U-shape,
rising from 6% to a peak of about 14% after about three years after returning to work, before
declining to about 11%.
She also finds that it is the first experience of unemployment that has the largest scar - 21.5% -
and that wage penalties are attached not only to the re-entry job but also to the job after that. These
findings suggest the importance of avoiding unemployment spells in the first place, and of
providing enough training for people to avoid further scars.
Gregory and Jukes analyse a very large sample constructed from the linked New Earnings Survey
Panel Dataset and the Joint Unemployment and Vacancies Operating System. They split the
scarring effect of unemployment into two components: the job interruption itself; and the duration
of the unemployment spell. The wage penalty from a job interruption is around 10% in the first
year, decreasing to a long run or permanent penalty of 2%.
A further wage penalty varies directly with the length of the unemployment spell, and has no
tendency to diminish as the unemployment experience recedes into the past. This duration penalty
is around 5% for those with a six-month spell of unemployment, rising to just over 11% for those
who had been out of work for a year. The future wage losses are most severe for men in the over-
45 age group.
Unemployment Scars
Gregg addresses the issue of how unemployment experiences as young adults contribute to
unemployment in adulthood, His paper, which draws on the National Child Development Survey,
examines whether the cumulated experience of unemployment from ages 16 to 23 is correlated
with that from ages 28 up to age 33. The results highlight how the experience of unemployment is
concentrated on the same minority of the workforce over these extended time periods. For
example, men who had no unemployment prior to age 23 (over half the sample) spent just 1.5%
of months out of work between the ages of 28 and 33. But those with more than a year out of work
by age 23 (around 8% of the sample) spent 19% of the months after age 28 unemployed.
Gregg's research suggests that low educational attainment, ability not captured by education,
financial deprivation and behavioural problems in childhood do raise a person's susceptibility to
unemployment and explain around a half of the persistence in unemployment experiences. There
is strong evidence of persistent effects of early unemployment experience for men. In contrast,
there is evidence of only minor persistence in unemployment for women and then only when the
women experienced at least a year of unemployment before age 23.
Notes for Editors: The symposium on 'Unemployment Scarring' is published in the November
2001 issue of the Economic Journal: 'Is Unemployment Really Scarring? Effects of
Unemployment Experiences on Wages' by Wiji Arulampalam (University of Warwick); 'The
Impact of Youth Unemployment on Adult Unemployment in the NCDS' by Paul Gregg
(University of Bristol); and 'Unemployment and Subsequent Earnings: Estimating Scarring among
British Men 1984-94' by Mary Gregory (University of Oxford) and Robert Jukes (Queen Mary
and Westfield College, London).
For Further Information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-
9770 or 07768-661095 (email: romesh@compuserve.com); Paul Gregg on 0117-928-9083 (email:
p.gregg@bristol.ac.uk); Mary Gregory on 01865-271951 (email:
mary.gregory@economics.ox.ac.uk); or Wiji Arulampalam on 024-7652-3471 (email:
wiji.arulampalam@warwick.ac.uk);