The Causes and Consequences of Unemployment

The causes and consequences of unemployment

Unemployment causes

There are three main causes of unemployment, the first is cyclical unemployment which is unemployment arising from a lack of aggregate demand. Demand for most products are likely to be low and unemployment may be high. Since not a lot of people are buying a product, firms do not need as much labour and will reduce it leading to unemployment. This in turn will lower disposable income and decrease demand for certain products, hence its cyclical title.

While cyclical unemployment arises due to the demand of labour, problems may also arise from the supply of labour. It may be that although there are job vacancies, employers are unwilling to employ because the people who applied lack sufficient skills. It may also be the case that there is a high level of immobility of labour. An example of this is if there are job vacancies in one part of a country, but the vast majority of the unemployed live in another part. These are characteristics of structural unemployment, unemployment caused by the decline of certain industries and occupations due to changes in demand and supply.

Immobility of labour also contributes to frictional unemployment. This is short-term unemployment occurring when workers are in-between jobs. This is not as serious as the previous causes of unemployment because it lasts for a shorter amount of time. Frictional unemployment however is always likely to exist within an economy. This is because it may be a seasonal job such as ice-cream sellers.

The consequences of unemployment

There are six main consequences of unemployment:

Lost output
Having people who are willing but unable to work is a waste of resources. A country is therefore not maximizing its output so living standards and international competitiveness is lower than what it ought to be.
Lost tax revenue
Unemployment means that there is a lower revenue gained from income tax. The potential tax revenue could be spent on improving healthcare or education. Such spending would increase the productivity of the country and the general living standards.
Government spending on benefits
Spending on job seeker’s allowance will go up the more people there are that are unemployed. This represents a larger opportunity cost which could limit the spending on key areas such as health.
Pressure on other forms of government spending
Greater unemployment may also lead to more crime or mental health problems, which requires more government spending to solve.
Costs to the unemployed
The unemployed may suffer from social disadvantages and will suffer from a loss of income. There may be increased arguments within households and/or a sense of worthlessness and aimlessness. Children of the unemployed will struggle at school because they may have less access to tools needed at home.
Hysteresis
This is unemployment causing unemployment. The longer someone is unemployed, the more likely that employers will see them as unemployable. This is because staying out of work for a long time indicates that they may not be good workers. Also, employers may become rusty and out of touch with advances in methods and technology.
The costs for other economies

Unemployment is likely to reduce trade in exports because of a decreased output. This in turn lowers AD and may cause even more unemployment.

A country may experience immigration from countries with high and rising unemployment. This is beneficial for countries with an ageing population and a shortage of labour but may soon become overbearing and place burdens on healthcare, transport and housing.

The benefits of unemployment

For some, unemployment gives people time to search for more rewarding occupations. It also allows firms to expand their businesses through the potential increase in recruitment.

A decrease in the number of workers can lead to a fall in the general price level. In addition, workers are discouraged to take industrial action or push for wage rises in a high unemployment economy because they can be replaced for someone who is willing to work for a lower pay.

The significance of unemployment

Unemployment is only significant if it is at relatively high levels and if it lasts for a long time. If this is the case, governments will have to spend more money on providing benefits to combat this. This means that they are presented with a huge opportunity cost regarding budget spending.