The Consequences of Unemployment

The Consequences of Unemployment

  • Unemployment can have consequences for the economy, the unemployed, and other economies

Lost Output

  • Of the unemployed were in work, then the country’s output would increase
    • Increasing output is likely to increase living standards, as the country would produce more goods and services
      • g. more films would be made or houses would be built to accommodate to the demand.

Lost Tax Revenue

  • If more people were in work, it is likely that incomes, spending, and a firm’s profit would be higher
    • This would cause the government to earn more revenue in tax
    • The government could then spend this money on spending schemes like education and health care
      • This SSP is likely to increase the economy’s productive capacity.
    • If the government wants to maintain its current level of spending, and the amount of people unemployed increases, it will have to raise taxes or borrow
      • Higher taxes will reduce people’s spending power via reducing their disposable income
      • A rise in government borrowing may push up the rate of interest, which would also reduce a consumer’s spending power

Government Spending on Unemployment Benefits

  • If unemployment rises, the government will have to spend more on unemployment benefits like Job Seeker’s Allowance
    • This may mean that the government has to then reduce spending in other areas, or increase borrowing or tax rates
    • There is therefore an opportunity cost of unemployment benefits – the money spent could be used for other things

Pressure on Other Forms of Government Spending

  • People being unemployed could cause them to have health problems or turn to crime
    • This is likely to cause the government to spend more in these areas


  • Hysteresis can occur in an economy – which is basically unemployment causing unemployment
    • From the demand side: this can arise as firms would be reluctant to take on anyone that’s been out of work for a long time
    • From the supply side: the longer a worker’s out of work, the rustier and worse their skills get, hence lower productivity

The Costs for Other Economies

  • Unemployment in country B, where country A usually exports, is likely to decrease the demand for exports
    • This will decrease country A’s aggregate demand, and could cause unemployment in country A
  • A country may also experience immigration from countries with high unemployment
    • This could be useful if the country has a shortage of labour, but could place a burden on the country’s housing stock.

The Benefits of Unemployment

  • If the economy is operating close to its full capacity, then a rise in unemployment, and hence a fall in AD, will likely results in a fall of the price level.

The Significance of Unemployment

  • How significant the consequences of unemployment are depend upon:
    • How much unemployment there is
      • g. a 3% rate of unemployment isn’t seen as a problem, as there’s usually frictional unemployment even in a booming economy, whereas a 10% level of unemployment would mean a greater loss of output and tax revenue, and an increase on government spending on benefits.
    • How long on average people are unemployed
    • The benefits provided to the unemployed
    • The type of unemployment
      • Cyclical unemployment tends to bring with it higher costs due to it being more widespread and on a more significant scale
      • Frictional unemployment has the lowest cost
      • Structural unemployment is more serious than frictional, but its effects are only likely to be experienced in particular areas of the country