The Coronavirus pandemic has resulted in unprecedented hardship for Americans as the nation’s health and economic stability have deteriorated. When the virus initially emerged, pandemic-related fear drove individual behavioral changes that had a chilling effect on the economy. State governments’ mandated business closures quickly followed, and both had predictable yet severe economic consequences.

Together, the pandemic and resulting shutdowns culminated in over 20 million American jobs lost, causing the highest unemployment rate since the Great Depression.¹ Each state has initiated some level of reopening since then; however some states have halted their plans due to increased infection rates, and others have re-imposed some level of previously mandated business closures.² As states continue to move forward weighing the costs and benefits of reopening, it is important to not only consider the economic and health consequences, but also how government shutdowns harm Americans’ mental health due to a loss of income, work, and social connections.

The easiest way to measure the extent of COVID-19’s impact on working Americans is to examine new applications for unemployment insurance during the pandemic. The chart below shows that nearly 6.9 million Americans filed jobless claims in the last week of March, the highest number since records began in 1967 and a level ten times greater than the peak of the Great Recession.³ Today, the level of weekly jobless claims remains above 800,000 – nearly 4 times higher than the six-month average before the pandemic – and 12.6 million Americans are still unemployed.⁴ Additional data show that the employment-to-population ratio dropped in March to its lowest level on record and stands today at just 56 percent, the lowest level since 1976.⁵ In short, the Coronavirus pandemic and resulting shutdowns created one of the worst labor markets in U.S. history.

Initial Jobless Claims

^{Source: Federal Reserve Bank of St. Louis}

The economic fallout from these business closures was unprecedented. In the second quarter of 2020, Real Gross Domestic Product (GDP) fell over 30 percent on an annualized basis, the largest decline on record.⁶ Consumer spending, investment, and manufacturing output all suffered similar declines⁷. Yet the economic decline describes only a portion of the harm that has been caused; increased joblessness also has negative ramifications for Americans’ mental health and wellbeing.

The consensus of existing research is that unemployment negatively affects mental health. First, a drastic loss of income can increase stress and anxiety, especially for parents that are worried about caring for their children. For instance, evidence shows that the poorest mothers are the most likely to have general anxiety disorder.⁸ Furthermore, researchers have found a positive association between poverty measures and common mental disorders like depression.⁹ Importantly, work is one of the largest dividers between people who face financial hardship and those who do not. In 2018, nearly 20 percent of unemployed Americans were classified by the Census Bureau as being low-income, compared to just 5 percent of individuals who were employed.¹⁰

The Coronavirus pandemic is a unique example in which large-scale unemployment did not lead to a proportional drop in income, potentially alleviating some financial stress. While millions of workers were laid off, a part of their income losses was offset by direct payments from the federal government. Furthermore, consumers were effectively forced to decrease their spending due to government shutdowns of bars, restaurants, and other businesses in the services industry, which rely heavily on in-person interactions. Even after these establishments have started to reopen, consumers’ safety concerns remain prevalent, keeping spending from returning to pre-pandemic levels.¹¹ These factors help to explain why in the worst quarter of the recession, disposable personal income rose by over 15 percent, and the personal saving rate reached its highest level in U.S. history.¹²

Unfortunately, financial stress is not the only consequence of unemployment; being without work can also negatively impact our mental state. Research shows that the largest benefits of work may not be related to income at all. In fact, one study found that roughly two-thirds of the costs of unemployment pertain to a decline in psychological wellbeing rather than a loss of income.¹³

There are multiple reasons why the value of work extends to psychology and not just income. Surveys have found that employed individuals enjoy increased self-esteem, greater feelings of control over their lives, connections to goals or purposes that transcend their own, and greater self-reported life satisfaction.¹⁴ Work also provides regular social connections and shared experiences with others that are incredibly valuable.¹⁵ In addition, being employed provides structure throughout the day, which has considerable psychological benefits, and helps us to establish a personal identity within the social institutions of society. ¹⁶ Finally, the trade-off between work and leisure time increases the value of both.¹⁷

Statistical analyses have confirmed the adverse impact of unemployment on mental health. One study found that the relationship between unemployment and mental distress is statistically significant even after taking into account the stress caused by a drop in income, and that the mental distress caused by unemployment is greater than the distress caused by impaired health.¹⁸

Another study analyzed the survey results of 10,000 men over six years asking participants to report their life satisfaction on a scale of zero to 10.  The researchers found that job loss was associated with a 1.2 point decrease in reported life satisfaction, while finding a job after unemployment had the opposite effect, leading to a nearly identical 1.1 point increase in satisfaction.¹⁹ The researchers further estimated that the psychological costs of unemployment were substantially greater than the monetary costs, suggesting that “income would need to be increased tremendously in order to trigger an increase in satisfaction large enough to just offset the adverse effect of unemployment.”²⁰  These findings align with previous work from the Social Capital Project, which found that men disconnected from the workforce are less happy and less socially connected than men in the labor force.²¹

It stands to reason, then, that the psychological distress and isolation caused by unemployment can also trigger anxiety, depression, and other mental disorders. A variety of empirical analyses support this notion, finding that being without work harms mental health.²² One study even suggests that unemployment in the years prior to one’s admission to a psychiatric hospital is a strong causal predictor for hospitalized mental illness.²³ 

The COVID-19 pandemic is case in point. As our nation has experienced record high unemployment levels and an ongoing health crisis, the mental health of many Americans has suffered. According to a survey conducted in early September, roughly 32 percent of Americans reported symptoms of anxiety disorder and 24 percent reported symptoms of depressive disorder.²⁴ This decline has spurred a greater demand for anti-anxiety medications, increased calls to crisis hotlines, and even led to a projected increase in deaths of despair.²⁵

It is likely that unemployment – which not only causes financial instability but also separates us from our social connections – has exasperated Americans’ mental health issues. The following charts provide evidence to support this theory. Based on the latest available data, states with higher levels of labor force participation rates are experiencing lower rates of depression (r=-0.72) and anxiety (r=-0.55).

^{Source: Bureau of Labor Statistics (BLS) Local Area Unemployment Statistics; Centers for Disease Control and Prevention (CDC) Indicators of Anxiety or Depression Based on Reported Frequency of Symptoms during the Last 7 Days}

Of course, it would be unwise to ignore the threat of Coronavirus entirely by uniformly opening businesses without consideration for public health; the Joint Economic Committee’s Reopen Readiness Metric Tracker is a great tool for keeping updated about the threat of COVID-19 and the ever-changing extent of its spread.

Instead, reopening should be approached in a thoughtful manner – taking into account both the costs of exposing new people to the virus if businesses continue to reopen and, alternatively, the costs of continued isolation and unemployment if businesses remain closed. This paper sheds light on the latter, providing evidence that being without work causes significant mental distress.

Jacqueline Varas
Senior Economist