Calculating the True Cost of Unemployment

What does being out of work cost you every month? If you think you already know the answer to that question, think again. It's probably costing you a lot more than you think.

If you currently find yourself in the serious predicament of being unemployed, trust me, I've been there. It aint pretty. I've had a lot of time to ponder this question. I don't think anyone would argue that the prospect of the economy returning to normal in the near future is a foregone conclusion.

It may surprise you to learn that the true cost of being unemployed has lasting repercussions on your past, present and future employability which you cannot even begin to grasp until you take inventory.

It's widely acknowledged by recruiters that each month that goes by without finding a job makes it that much harder to get back into the game. Most job seekers accept this line of reasoning on its face but still don't understand the true extent of the "hurt" until it's spelled out for them by someone who's experienced the job drought first-hand – or a high-priced outplacement firm for whom unemployed executive is their next meal.

Let me save you the expense. According to the U.S. Department of Labor (Bureau of Labor Statistics), just four years ago, the average time it takes an executive to land a new job is 10 weeks. These were the statistics before the economy took a turn for the worse and it's probably safe to assume that those rates have worsened considerably. Furthermore, 92% of all people who have been out of work for more than 12 months have had to accept a pay cut when they found a new job.

But what if I told you it will cost more than a year's salary during the term of your unemployment? Don't look at me cross-eyed! According to my calculations, you can bank on losing at least 150% of your accrued monthly salary while unemployed. And that's to say nothing of the actuarial costs, such as the money you are spending on transportation and entertainment while you've got nothing to show for your day.

Adding Up the Gross Costs of Unemployment

There's a quick and dirty formula you can use to calculate the true, total costs of unemployment. Apply it to yourself and see if it offers a fresh insight into your situation.

Living Costs + Income Loss + Opportunity Cost + Setback Cost + "Waiting Tax" = True Cost of Unemployment

Here's a quick breakdown of the five "costs" one incurs by being out of work.

  1. Income Loss - How much money you could have pocketed at the end of the month if you had kept receiving income. This is the money you count on when you're employed and one of the first costs you notice when you're not.
  2. Costs of Living - Unless you've figured out how to live for free, these go on whether or not you have an income to support them. Ouch, people usually realize this one pretty quick after they've lost their job.
  3. Opportunity Costs - Now we get into more esoteric, but still very real numbers. This represents all of the things you might have invested your money and time into for the purposes of creating future wealth. Your retirement savings, 401k's, life insurance. All the stock investments you could have made but didn't. Even business opportunities you had to turn down because you had neither the time or money to pursue them. Oh yeah... it takes money to make money.
  4. Setback Costs - This is where it gets really painful. Your setback costs are all the assets you've accumulated over time but had to sell in order to make ends meet today. You worked hard to acquire this stuff, probably paid a pretty penny for it and now you're liquidating it like a furniture store fire-sale. Man, you didn't realize you'd have to backpedal this much.
  5. The "Waiting Tax" - Which brings me to the "waiting tax." This is the negative impact on your future marketability by being chronically out of work. While you're holding out for the "perfect" job, there are people out there staying busy and making money. It might be work they consider to be less-than-ideal but they won't have an enormous gap in their employment to justify.

Accrued Costs of Remaining Unemployed Over Time

For illustrative purposes only.