8/6/2019 Discuss the Economic Consequences of Unemployment

1/2

Paul Blower

Discuss the economic consequences of unemployment.(18)

The unemployed are those without work, and actively seeking and willing to work. They must have

been looking for a job in the past month and are able to start work in the next fortnight. There are

two measures of unemployment; the first is the Labour Force survey, which is a count by employers

of all those in work. The second is the claimant count, the number of those claiming unemployment

benefits from the state. The claimant count tends to be lower than the Labour Force survey, since

not all those who are out of work claim unemployment benefits.

There are numerous consequences associated with unemployment, for instance the fact that there

is a loss of potential output, and therefore the economy is working below capacity, below potential

GDP and at a loss of economic welfare, to all of the population. Furthermore there will be lost tax

revenue to the state, so less capital to spend on schools, hospitals and all other areas of government

spending. Unemployment also of course means increased spending on not only unemployment

benefits, but other welfare benefits that are allocated progressively. In the UK for a long time one of

the reasons government spending has been able to increase is that tax revenues were seen to be

rising, however with unemployment currently riding so high, major cut backs have had to be made in

government spending, notably in higher education and the police.

Some advantages can be found to occur due to unemployment, for instance there will be a bigger

labour supply to choose from, therefore the labour force will generally be better educated, trained,

and have much better experience (as is distinctly happening currently in this country). Furthermore

if there is a larger number of people out of work, and there is increased competition for jobs, the

public will strive to be better educated, trained and more experienced, and thus the labour force will

become even better, a quasi multiplier effect. Moreover, if consumer expenditure is at a lower level,

due to decreased household income, then inflation will be more stable, as there is a reduced level of

demand pull inflation.

However there are many disadvantages to inflation, firstly shown on the following PPC is how

unemployment means the economy is working below capacity;

Other disadvantages include the fact that real GDP will in effect be lower, since not as much

economic activity is taking place, as not all the available factors of production will be in use. There

will also be a loss of living standards because of lower household incomes. For government

spending, an opportunity cost will be felt from having to spend money on benefit payments, and not

8/6/2019 Discuss the Economic Consequences of Unemployment

2/2

Paul Blower

on social infrastructure like schools and hospitals, and all other areas of government spending.

Furthermore the government will not be receiving so much from income tax, and other forms of

indirect tax such as VAT, since consumer expenditure will be lower. There will be social

consequences like crime, and what is named points of social dislocation, such as higher divorce rates

and suicide rates. People out of work will also be losing the up to date skills attained by being in the

working environment, which therefore means the labour supply will be less appropriate for whatemployers require and need.

The economic consequences of unemployment are subject to many different things. It depends

upon the scale of unemployment; this would firstly greatly affect the impact on government

spending, for instance if unemployment was relatively small, then the loss from income tax and

other forms of taxation would be smaller, and the costs of benefit payments would be smaller.

Furthermore, if unemployment is not as common then many people may not feel the need to claim

unemployment benefits, if only one person in a household is out of work, rather than two or more

people being out of work in a household, impacting the household income way less.

It depends upon whether unemployment is long or short term, because the social and financial

consequences of unemployment would be felt much more if unemployment is long term, because

here would be a sustained loss of government income, and thus a sustained decline in government

spending on social infrastructure, housing and welfare payments. The effects are also highly

dependent upon the type of unemployment in question, for instance structural unemployment

would mean a disparity between the skills of workers and those that are in demand, and may result

in a longer stint of unemployment, as the unemployed seek education and training in skills that will

get them back into work. Cyclical unemployment therefore will be much less of an issue, since this is

created by the peaks and troughs of the business cycle, and therefore an end to this unemployment

is usually foreseen. Frictional unemployment would also not be so much of an issue, since this is

merely people who are moving between jobs, unless of course, as is currently occurring in this

country, frictional unemployment is the result of too many jobless graduates. Finally the impact ofunemployment will be much less if the majority is voluntary unemployment, this means people are

happy and able to be out of work, and therefore the economic consequences have been weighed up

(at least for the individual or family), unlike involuntary unemployment.

I believe the most important factor in the type and scale of economic consequences will be relatively

how many are unemployed, because small doses of unemployment will not have great social and

economic impacts, yet mass unemployment can lead to instances like the Great Depression of the

1930s and 40s. This will also have a lot to do with the timescale of unemployment, and if the time

people spend out of work is relatively small, then the consequence of unemployment will also be

relatively smaller, as this shows a functioning, growing economy where jobs are being created, as

opposed to one where unemployment is widespread. Therefore these two point will have thegreatest impact on the economic consequences of unemployment.