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In this article we’ll discuss the consequences of unemployment to the government, the economy, firms and individuals.
Also, we’ll follow on this discussion with an evaluation of the impact of unemployment.
Recommended reading: Business Thoughts for Young People.
As you can imagine, a decrease in the number of people working will lead to a decrease in the amount of income that is taxed. With aggregate demand falling, firms will face lower demand and potentially earn less profits. This will reduce corporation tax collected as well. There will be a variety of other tax revenues that are reduced if the overall level of spending falls in the economy.
As unemployment rises, the government will naturally have to increase its payout of unemployment benefits (in countries where this is practiced). This will increase government spending. The overall impact may be a movement of the fiscal balance towards a deficit. This is simply down to an increase in spending coupled with a decrease in tax revenue collected.
Let’s take a broader perspective and consider the impact to the economy. With a rise in unemployment, labour resources are under-utilised and output is reduced. The economy will move to an inefficient point within its PPC. The maximum combination of consumer and capital goods will reduce and then result in lower living standards.
Reductions in spending will also produce negative multiplier effects which will reduce spending even further.
Next up are the consequences to firms. You’ll notice the first two points seem contradictory. This is because the impact to firms depends on the kind of products they are selling. If they are selling normal goods, then demand should fall. If they are selling inferior goods, they should see the demand for their products rise. A firm operating in an environment with high unemployment will have a large pool of candidates to choose from. During periods of high unemployment, firms will receive higher than normal amounts of applications and face a greater selection of potential employees. Additionally, in such economic conditions, they may be able to hire workers at lower wages as compared to periods of high employment when job candidates have more options.
Next think about the employees who have jobs. They will be less likely to ask for a raise in tough economic conditions.
Finally, let’s look at the consequences of unemployment to individuals. There’s a long list to follow. First and foremost is the loss of income. After losing their jobs, workers lose their employment income and thus will likely have reduced living standards. For lower income earners, this may push them into poverty. For a lot of workers, their job is a source of identity and losing their job could have psychological consequences as well. If an individual is unemployed for a long period of time their skills may suffer and will not remain up to date. This process is called deskilling and it has further implications for the economy as a whole as well. With no work and loss of income, social problems may arise as some turn to crime. Domestic violence and substance abuse may arise if the psychological effects of unemployment are severe.
The upside of this depressing list is the time it creates for individuals to pursue alternative employment. They could seek out a new employer which suits them better or they can also switch careers. Some may choose to start their own businesses if work is not available.
With all this said, it’s important to remember that the impact of unemployment will depend on its severity and its duration. If the economy is at full employment and unemployment rises by .0001% it will have less of an impact than if it rises by 15%. Also, the duration of unemployment is significant when considering its impact. Prolonged unemployment is more harmful than short-term unemployment.
We also need to remember that not all unemployment is equal and must to consider the initial cause (cyclical, frictional, structural or seasonal). The consequences will vary by type. By now you should have a better understanding of the consequences of unemployment to the government, the economy, firms and individuals. You should also be better placed to evaluate the impact of unemployment and be prepared to adjust your assessment of its severity to the context provided.
If you have any questions or comments, please leave them below and let’s try to address them together. That’s it, see you in the next insight!