08 March 2010

Education and Hidden Unemployment Costs

It isn't uncommon to see an economic analysis of the benefits of a college education or a high school diploma. Typically, the discount expected lifetime incomes for median people of each education level, and then reduce the advantage for college education by taking into account opportunity costs and the costs of getting the education (tuition, room and board, etc.). But, the advantage of education is probably greater than indicated because education also has a powerful impact on unemployment rates, which is rarely taken into account in such studies.

Unemployment not only reduces earnings, it makes it much harder to accumulated liquid savings and makes it much risker to save through in the form of home equity which can be wiped out due to failure to make a payment in a short term interruption of employment. Also, since unemployment tends to coincide with low financial asset prices, it makes the risk of having to sell market prices financial assets that have the highest average returns for a low price much greater. And, income interruption can lead to missed payments on other debts, which in turn can hurt that person's credit and make it more expensive for them to get credit in the future.

Unemployment can also be a self-fulfilling prophecy by making getting a new job now more important than getting a job with the maximum long term income potential even adjusting for the no income delay required to find a better job and larger economy interest rates.

This is one reason why studies of wealth show that people in moderate income professions with high job stability, like teachers, are so good at accumulating wealth compared to the average. Instability of employment does economic harm to people beyond mere lost income.

The dual income amount and unemployment consequences of education go a long way to explaining class structure in the United States.

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