An Interdisciplinary Approach to Teaching the Causes and Consequences of Unemployment

Developed by Arthur H. Goldsmith, Washington and Lee University.

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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project
Initial Publication Date: September 2, 2010


In this teaching exercise students will extend the conventional economic framework for analyzing the causes and consequences of unemployment to incorporate insight from psychologists and sociologists. Thus, the exercise adopts the hierarchical approach to interdisciplinary learning. Students will explore theories from psychologists and sociologists that link joblessness to emotional well-being and discover how economists then connect the psychological status of a nation's workforce to their productivity. These linkages are then built into standard economic models for analyzing aggregate output and prices (i.e., aggregate supply – aggregate demand) and for employment determination (i.e., marginal productivity theory of labor) to obtain a richer more complete understanding of the impact of a recession. The analysis reveals that recessions are expected to be deeper and of greater duration when an interdisciplinary analysis is conducted. Moreover, alternative (i.e., non-neoclassical) paradigms within the discipline of economics for explaining joblessness are briefly described and brought into the discussion. Finally, policy options for eliminating a recession are re-considered given the interdisciplinary framework offered in this exercise.

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Learning Goals

After exposure to this in class example presentation, the student should be able to;

1. Explain, and demonstrate the causes and consequences of a recession using conventional aggregate demand-aggregate supply analysis and the marginal productivity model of employment determination.

2. Identify and explain the impact of alternative policy options for eliminating unemployment, and demonstrate the impact of these policies - using conventional aggregate demand-aggregate supply analysis and the marginal productivity model of employment.

3. Explain the consequences of unemployment through the lens of social psychologists and sociologists.

4. Extend the conventional aggregate demand-aggregate supply analysis and the marginal productivity model of employment determination to account for insights from psychologists and sociologists, and use this interdisciplinary framework [add citation to page on glossary of terms for alternative frameworks of analysis] to re-examine the consequences of joblessness.

5. Develop the capacity to extend the interdisciplinary framework for examining the impact of unemployment to account for factors that may mediate the consequences of joblessness.

Context for Use

This presentation is designed for a principles-level course in macroeconomics but is also well suited for use in a course on labor economics or other courses that require limited pre-requisites such as a freshmen seminar, or a class on social issues. The presentation can also be easily extended for use by faculty and students engaged in the study of Intermediate or Advanced Macroeconomics or a course on Business Cycles. This presentation is appropriate for any size class and can be completed in one class meeting. Students should already have learned how to derive and manipulate the aggregate supply--aggregate demand model of output and price determination prior to exploring the causes and consequences of recession from an interdisciplinary perspective. In addition, it would be ideal if they have learned the marginal productivity theory of employment in a principles of microeconomics or macroeconomics course before approaching this topic in an interdisciplinary fashion. Familiarity with these analytical frameworks provides students with the foundation needed to extend the conventional - neoclassical - approach to evaluating the causes and consequences of joblessness to incorporate valued insights from other disciplines into a more inclusive analytical structure. Students who have not been exposed to these analytical frameworks for determining employment, output, and price- or who need a refresher - should take time to examine the review file provided entitled; "A Primer on Aggregate Output and Employment Models."

Description and Teaching Materials

Overview: An Interdisciplinary Approach to Teaching the Causes and Consequences of Unemployment

Below are questions (Q) and prototype answers (A) that can be used to engage students in a conversation entailing "An Interdisciplinary Approach to Teaching the Causes and Consequences of Unemployment." In addition, pictures Recession Analysis Pictures: Conventional (Acrobat (PDF) 19kB Mar12 10) are provided to conduct a conventional economic examination of the causes and consequences of recession and pictures Recession Analysis Pictures: Interdisciplinary (Acrobat (PDF) 22kB Mar12 10)to address the same issues when insights from psychologists and sociologists are accounted for and integrated into the standard economic framework of analysis are presented.

Setting the Stage: The Conventional Approach

This section provides questions and prototype answers that can be used to guide an instructor in establishing for students the conventional perspective on the causes and consequences of unemployment. This knowledge is necessary as a means of establishing the benchmark, with economics as the core discipline, for an interdisciplinary exploration of this topic. A sub-set of the questions and associated answers used to teach about the causes and consequences of unemployment in a conventional way is provided below, the full-set is available at Q&A Conventional Approach to Unemployment (Acrobat (PDF) 21kB Apr15 10)

Q. What analytical framework do economists use to determine the equilibrium level of aggregate output and price?

A. Aggregate supply and demand.

Let's set out this graphical model (Figure 1-A). Suppose the economy is in both short-run and long-run equilibrium at point A so the economy is operating at full employment. Moreover, let's label the equilibrium level of output (i.e., income) as YA*(the * denotes the full employment level of income and output), and the price level as P1.

Q. At the full employment equilibrium is there any joblessness or unemployment?

A. Yes, even though the quantity of aggregate demand equals the quantity of aggregate supply in the short-run and in the long-run at P0 there is still some frictional unemployment.

Q. What is frictional unemployment, and why are some individuals frictionally unemployed?

A. People searching for work, for whom a job exists, but who are yet to make a match with an employer are frictionally unemployed. This situation arises because employers searching for workers recognize that workers are heterogeneous (i.e., they differ) and are attempting to find the best worker which takes time. In addition, persons seeking work understand that firms are heterogeneous and it takes time to search available employers for one offering a set of job characteristics considered best.

Q. What analytical framework do economists use to determine the equilibrium level of employment and real wages?

A. Marginal Product of labor

Let's set out this graphical model (see Figure 2-A) if the capital stock is K0 (recall that the level of K determines the height of the MPL curve). Since the level of employment is LA then if firms are maximizing profits the real wage paid to labor is w0/P0.

Moving to an Interdisciplinary Perspective on the Causes and Consequences of Unemployment

This section provides questions and prototype answers that can be used to guide educators in providing students with an interdisciplinary exploration of the causes and consequences of unemployment that integrates insights from sociology and psychology into the conventional economic framework used to examine this topic. A sub-set of the questions and associated answers used to teach about the causes and consequences of unemployment in an interdisciplinary fashion is provided below, the full-set is available at Q&A Interdisciplinary Approach to Unemployment (Acrobat (PDF) 18kB Apr15 10)

Q. Can you identify academic disciplines that, like economics, explore the causes and consequences of unemployment – but given their disciplinary framework of analysis?

A. Political Science, Psychology, and Sociology.

Q. What does the filed of sociology entail?

A. According to the American Sociological Association, "Sociology is the study of social life, social change, and the social causes and consequences of human behavior." Sociologists investigate the structure of groups, organizations, and societies, and how people interact within these contexts. Since all human behavior is social, the subject matter of sociology includes the family, school, work, and religion. Sociologists explore the importance of race, gender and social class when studying social behavior and interaction.

Q. What does the filed of psychology incorporate?

A. Psychology is the science of the mind and behavior on the part of humans and other animals. The word "psychology" comes from the Greek word psyche meaning "breath, spirit, soul", and the Greek word logia meaning the study of something. For a psychologist, human behavior is used as evidence - or at least an indication - of how the mind functions since we are unable to observe the mind directly. However, virtually all our actions, feelings and thoughts are influenced by the functioning of our minds.

There are many branches of psychology and some of the most relevant for the study of employment related issues is; cognitive psychology, developmental psychology, social psychology, and occupational psychology. Cognitive psychologists explore internal mental processes, such as problem solving, memory, and learning (i.e., how people think, perceive, communicate, remember and learn). Developmental psychology is the scientific study of systematic psychological changes that a person experiences over the course of his/her life span often in response to salient experiences such as marriage, divorce, employment, and job loss. Occupational or Industrial psychologists study the performance of people at work and in training, to develop an understanding of how organizations function and how people and groups behave at the workplace. Social psychology - uses scientific methods to understand and explain how feeling, behavior and thoughts of people are influenced by the actual, imagined or implied presence of other people. In their view, social perception and social interaction are the keys to understanding social behavior.

Q. Is it possible that the unemployed suffer non-economic costs associated with their bouts of joblessness? If so, what forms might they take?

A. Yes, they may be angry, disappointed, fearful of the future, worried about finding another job, and begin to doubt themselves in terms of talent. All of this may cause them to be depressed, and less motivated. Moreover, they may withdraw from others and be hostile. In short there are likely to be adverse psychological consequences associated with joblessness.


Assessment Overview

I believe that the ideal manner in which to determine if student understand how to extend the conventional formal economic models of output-price determination and employment determination by incorporating insight from psychology and sociology is to ask them to determine – using the interdisciplinary framework developed in class - the impact of some new or additional information that can be expected to influence the intensity of the psychological and sociological affects of joblessness. This activity or exercise can take the form of a short – out of class – writing assignment in the small class situation. Alternatively, the same assignment can be structured in the form of a multiple choice question in the large class setting or could be arranged as a one-paragraph short answer question if desired. Below, I lay out the essay assignment approach.


Suppose the appropriate models output-price determination and employment determination incorporate insight from psychology and sociology. Set out each of these pictures under the presumption that the economy is in a full-employment equilibrium at Point A. Suppose that managers throughout the nation begin to hold dim views of the future in their sector of the economy. In light of this, some members of congress are advancing a bill that would provide both counseling and a gym membership at no cost to anyone person who loses their job. Please write an essay that reveals what would happen if their bill does not pass – be sure to use your pictures in constructing your answer. Then, discuss and demonstrate what would happen if their bill was incorporated into the law. If you feel compelled to make any assumptions in developing your analysis, state them clearly.

Alternatively, students can be asked to explain if the impact of a decline in spending on output and employment, given the economy were in a full-employment equilibrium, if all those laid off were married with children (or middle aged) rather than a situation where the layoffs were restricted to those who are single and without children (young).


Essays are graded on a rubric. A student who can set out the conventional framework, but who is unable to lay out an interdisciplinary model incorporating insights from sociology and psychology would receive a C-. Students who set out the interdisciplinary framework and simply describe matters as in class discussion would earn a C+ or B-. To earn a higher mark, students should be able to articulate the notion that counseling and gym memberships should help to mediate or reduce the adverse psychological consequences of joblessness to some extent. Thus, the magnitude of the decline in workforce productivity should be smaller. In addition, they should be able to display the differential impact of providing - or not offering - the unemployed these services.

References and Resources

Darity, William Jr. and Arthur H. Goldsmith, Winter 1996c. "Unemployment, Social Psychology, and Macroeconomics," Journal of Economic Perspectives, 10(1), pp. 121-140.

Goldsmith, Veum, and Darity (1996c) present a theory of the macroeconomy that accounts for psychological status of a nation's workforce. Using this framework the authors challenge the notion that there is a single natural rate of employment and unemployment given a fixed stock of capital and technology.

Doeringer, Peter, and Michael Piore, 1971. Internal Labor Markets and Manpower Analysis, Lexington, MA: DC Heath.

Doeringer and Piore (1971) present a theory to explain inequality and poverty in this book that challenges the view that the poor are those who simply are less talented a well known prediction from classical economic ways of thinking. They argue that the world of work is stratified into two separate spheres - primary work (i.e., desirable jobs) and secondary work (i.e., unattractive work) - and that mobility is limited between these arenas. They assert that institutional arrangements and discrimination play a central role in where persons find work and hence factors not linked to merit govern poverty and inequality.

Eisenberg, P., & Lazarsfield, P. E (1938). The psychological effects of unemployment. Psychological Bulletin, 35, 358-390.

Eisenberg and Lazarsfeld's (1938) conducted interviews with unemployed persons in the United States during the Great Depression. Their ethnographic work revealed that as the duration of unemployment lengthened psychological well-being began to appear and deepened as duration advanced.

Erikson, E.H. (1959). Identity and the life cycle. Psychological Issues, 1, 50-100.

Erikson (1959) is the founder of the life span developmental theory which posits that healthy development of an individual's ego and self-esteem depends on successful completion, in order, of eight successive stages. During the fifth stage, Erikson's 'industry stage,' an individual must move from adolescence to adulthood, a transition contingent upon attainment of a desirable occupational identity and hence success in the labor market otherwise an individual's sense of worth and emotional well-being are diminished.

Granovetter, Mark, 1973. "The Strength of Weak Ties." American Journal of Sociology, 78, pp. 1360-80.

Granovetter (1973) extends Dual Labor Market Theory to offer an explanation for who ends up in poorer secondary sector jobs, why this is the case. He also identifies the factors that prevent those who wind up in the secondary sector from being optimistic about their chances to move into primary sector employment.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 2000 "Motivation and Labor Market Outcomes," 19, pp.109-46, Research in Labor Economics.

Using data drawn from the National Longitudinal Survey of Youths they demonstrate that persons with a more internal locus of control earn higher wages than persons with similar characteristics who had an external locus of control.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 1997a. "Unemployment, Joblessness, Psychological Well-Being and Self-Esteem: Theory and Evidence," Journal of SocioEconomics,26(2), pp. 133-158.

Goldsmith, Veum, and William Darity (1997a) offer evidence based on data drawn from the National Longitudinal Survey of Youths, that jobless harms self-esteem and that the decline is greater for those exposed to longer bouts of joblessness.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 1997b. "The Impact of Psychological and Human Capital on Wages." Economic Inquiry, October, 35(4), pp. 815-29.

Using data drawn from the National Longitudinal Survey of Youths, Goldsmith, Veum, and William Darity (1997b) demonstrate that persons with greater levels of self-esteem earn higher wages than persons with similar characteristics but with a lower level of self-esteem even after accounting for the possibility that higher wages foster improvements in self-esteem.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 1996a. "The Impact of Labor Force History on Self-Esteem and its Components: Anxiety, Alienation and Depression," Journal of Economic Psychology, 17, pp. 183-220.

Using data drawn from the National Longitudinal Survey of Youths respondents levels of self-esteem is broken into component parts associated with alternative aspects of emotional well-being including; somatization (i.e., and inability to sleep), anxiety, depression. Using this data Goldsmith, Veum, and Darity (1996a) demonstrate that joblessness damages self-esteem and one of the primary channels is by fostering feelings of depression.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 1996b. "The Psychological Impact of Unemployment and Joblessness," Journal of SocioEconomics, 25(3), pp. 333-358.

Goldsmith, Veum, and Darity (199ba) offer evidence that locus of control for women falls due to unemployment exposure but not for males. It has a scarring effect and the experience of those out of the labor force and the unemployed is similar.

Goldsmith, Arthur H., Veum, Jonathan R. and William Darity, Jr., 1995. "Are Being Unemployed and Being Out of the Labor Force Distinct States?: A Psychological Approach," Journal of Economic Psychology, 16, pp. 275-295.

Using data drawn from the National Longitudinal Survey of Youths, Goldsmith, Veum, and Darity (1995) demonstrate that persons outside of the labor force and the unemployed exhibit virtually identical levels of psychological well-being and their status is much poorer than that of employed persons with similar characteristics. This finding is consistent with the notion that the discouraged unemployed do not experience an improvement in emotional well-being simply by deicing to stop looking for work.

Jahoda, M.aria, 1979. "The Impact of Unemployment in the 1930s and 1970s." Bulletin of the British Psychological Society, 32: pp. 309–314.

In a seminal piece of research Jahoda (1979) conducted an in-depth study of a small Austrian Village, Marienthal, beset by high unemployment. Her findings, based on interviews with families with an unemployed breadwinner, revealed a marked deterioration in well-being and the jobless generally described themselves as psychologically broken. Following the depression, growth in the availability of unemployment insurance and welfare programs for the indigent has reduced the level of material deprivation that accompanies unemployment.

Lefcourt, H. M. (1982). Locus of control: current trends in theory and research (2nd ed.). New Jersey: Lawrence Erlbaum Associates.

Lefcourt's (1982) review of research on locus of control reveals that cognitive orientation influences all phases of productivity and task performance: problem recognition, information retrieval, evaluation, and interpretation as well as decision making. He notes that persons with internal orientation – relative to those with an external locus of control – are more able to perceive the challenges inherent in different situations and are more intellectually flexible making them better problem solvers and hence more productive.

Seligman, M.E.P. (1975). Helplessness: on depression, development and death. San Francisco: W.H. Freeman.

Seligman (1975) developed the concept of learned helplessness, based on a series of animal based experiments. He found that exposure to uncontrollable situation led to a sense of helplessness and that even when subsequent situations arise where control is possible the sense of helplessness remains and can precipitate diminished mental health status.

Winkelmann, Liliana and Rainer Winkelmann, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data." Economica. 65, pp. 1-15.

Winkelmann and Winkelmann (1998) offer a superb review of the literature on the connection between jobless and psychological well-being. In addition, using panel data on men in Germany they report that unemployment has large detrimental effects on life satisfaction even when income is held constant due to unemployment insurance arrangements.