How costly are recessions? To answer that question, analysts often calculate the lost GDP due to the higher levels of unemployment and idle capital during economic slumps. For example, during the Great Recession, the Dallas Fed estimates the loss was between $6 trillion and $14 trillion, or $50,000 to $120,000 for every person in the U.S.
However, the economic costs of recessions encompass far more than simply the goods and services that could have been produced, but weren't. They also include the psychological costs of being unable to provide for one's family, health costs due to increased stress, drug problems, higher suicide rates, family conflict and so on.
Evidence also shows that new entrants into the labor market during recessions have a lower lifetime earnings trajectory than those who enter during better times.
That may explain new research results showing that young people who leave school during recessions have a much higher chance of becoming career criminals. Why does this happen? Of course, one reason is the higher unemployment rates and diminished job prospects that occur during recessions.
But "feedback effects" can also reinforce the choice to engage in crime. First, as the researchers Brian Bell, Anna Bindler and Stephen Machin noted, involvement in crime may lead to an increase in "criminal knowhow" that raises the "expected net benefit of crime" -- the difference between the expected gain and the chance of getting caught. This makes it more likely that an individual will choose to commit a crime.
Second, those who do get caught may have difficulty finding a job because of their criminal record.
How large are these effects? The researchers "find that the average arrest rate for a cohort entering the labor market during a recession is 10.2% higher than for an otherwise similar cohort entering a more buoyant labor market." In addition, "entering the labor market during a recession increases the probability of being incarcerated at some point over the next two decades by 5.5%." Thus, the effects are relatively large.
This research highlights the need to do all we can to ensure that job opportunities for young people don't dry up when the economy takes a turn for the worst. In addition to the diminished lifetime prospects that recessions lead to for those who do find jobs, those who can't are much more likely to turn to a life of crime.
Investments in youth may help reduce these costs. And if this research is correct, the benefit of such investments may be higher than expected.