3.2.2
Note

Consequences of Unemployment

3.2.2 Macro issues

Idea

High unemployment lowers living standards and weakens the wider economy. This note is a neutral catalogue of the effects on each agent for use in evaluation; it reaches no verdict.

Considerations

  • Consumers — reduced standard of living. Unemployment cuts household disposable income, so purchasing power and induced consumption fall, lowering the material standard of living. Prolonged unemployment can erode workers’ skills, making re-employment harder still.

  • Producers — reduced profits and investment. Falling consumer confidence reduces demand for goods and services, cutting firms’ revenue and profit. Poor business sentiment, together with higher crime and social instability, also lowers investor confidence and the marginal efficiency of investment (MEI), reducing investment.

  • Government — slower growth. Weaker consumption and investment reduce aggregate demand, slowing actual economic growth.

  • Government — budget deficit. As incomes and profits fall, income- and corporate-tax revenue falls, shrinking the budget available for public spending. The strain is greater where the state funds extensive welfare, since more is paid out in unemployment-related support just as revenue contracts.

Context

Beyond the measurable costs, sustained high unemployment raises social and political instability — higher crime rates and unrest — which lowers non-material living standards. This is why keeping unemployment low (full employment) is one of the government’s central macroeconomic aims.