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The Scarring Effect of Unemployment

A few days ago I was reading some literature on how long-term unemployment can be debilitating for the affected.

Not only does chronic unemployment potentially cause psychological distress, but it also diminishes one’s chances of ever entering or re-entering the job market. In other words, the longer one stays unemployed, the more likely they will never get a job. Since staying unemployed for long means one does not acquire or build their skills through on-the-job training, it is assumed that one’s human capital depreciates with time. As such, one becomes less appealing to employers. This is called the scarring effect of unemployment.

The scarring effect is more likely to occur if one experiences an unemployment spell in their early productive years after formal training. That is, a person who graduates in 2020 and remains unemployed for the next 5 years, for example, has a far lower chance of entering the job market compared to a person who becomes unemployed after several years of being in productive employment.

Even if one eventually finds employment after being chronically unemployed, the scarring effect still occurs, but in the form of a wage penalty. Generally, people who find employment after years of unemployment are likely to earn lower than they would have had they not been unemployed for long. This wage penalty also originates from the assumption that human capital depreciates in the absence of on-the-job training. As one’s human capital depreciates, so does their value in the Labour market.

We are sharing with you this because we are in the middle of a pandemic. Many people have lost jobs and their goose might just be cooked for many years to come. People who graduated just before and during the pandemic as well as those who will graduate shortly after the pandemic, if it will ever end that is, are at an even greater disadvantage if the aforementioned theory is anything to go by. Considering the ‘economic recession that has originated from the pandemic, it will be more difficult for youths who graduated during this period to find a job. This means that many of these young graduates are likely to stay longer in unemployment and the longer this duration is, the harder it will be for them to enter the job market in the future.

But what particularly caught our attention when we were reading this literature is how long-term unemployment contributes to internal brain drain. (Just recently, we learned that internal brain drain might be a much bigger problem for this country than the kind of brain drain that typically comes to mind when this problem is mentioned.) The longer one stays in unemployment, the less likely they are to end up practicing what they learned in college or university. Let me use myself as an example: I graduated with Media and Public Relations, but I have never practiced PR in any formal setup. If I didn’t have any way of earning a livelihood several years after graduation, I wouldn’t think twice if I stumbled upon an opportunity to work as a casual laborer in a factory.

And this is the story of many young people in this country. Just a few years ago, there was a thread on social media that prompted people to state what they had studied in college and what they are currently doing to earn a living. In every 10 people that commented, 17 said they are doing something that is totally unrelated to what they studied; that is if they are doing something in the first place.

Skilled individuals are likely to consider work unrelated to their field of study owing to the desperation that comes with chronic unemployment. After several years of unemployment, an individual typically lowers their initial employment and wage expectations. When my peers and I were graduating, our target was to get employment in big companies with a good salary but life just happened.

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