Debt and Unemployment

Theories

In April 2010, the Yale Center for the Study of Globalization published an article that explored the causes of unemployment and debt, explaining that economists with the Obama administration believe unemployment to be cyclical in nature, and that the job market would improve. However, the unemployment rate was 6.7 million in 2007, and more than doubled to 15 million in March 2010.

The Yale study discussed the notion that personal unemployment and debt are closely tied to national debt. With the United States indebted to foreign countries, worldwide investors are loathe to lend funds to American corporations. This lack of funding drives up interest rates, and forces companies to cut back on expenses, including overhead costs like employment. In turn, unemployment rates rise and the personal debt of those without income increases.

Because of the low interest rates and plentiful availability of unsecured loans, unemployed people are able to take out loans to get through emergency financial situations, explains a 2008 article published in the "Journal of Human Resources." The article explains that when low income households with an unemployed wage earner borrow money, they lose 11 cents per dollar of lost earnings, driving the household into a deeper debt out of which to climb once employment is secured.

In May 2010, Medill Reports published statistics that showed unemployment in individuals over 25 with bachelor's degrees had doubled between February 2008 and February 2010, and that about 7.2 percent of student loans were in default. To help ease this burden, in 2010 the federal government enacted the Student Aid and Fiscal Responsibility Act. Under the new legislation, the government provides loans to students without private lenders being involved in the process, which will likely result in lower interest rates.

To cope with unemployment and the subsequent debt, Virginia Tech University advises staying active and involved with social circles and to spend time rehearsing job interview skills. Be honest with creditors and create a reasonable payment schedule that will remain in place until regular paychecks restart. Restrict frivolous spending and shop at discount retailers, but remember to explain these lifestyle changes to children. Teens and older children can understand sudden spending changes and may have ideas on how to spend less or earn more.