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Q&A - How are businesses affected by unemployment?

Tuesday, October 27, 2009
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Businesses are affected in a variety of ways depending on whether unemployment is high or low, and rising or falling.

Some business implications of rising / high unemployment include:

• Lower consumer spending = lower demand for income-elastic products
• Demand for inferior goods (lower price, quality) may increase
• Greater supply of labour – potentially lower wage/salary levels
• Unemployment creates insecurity in the workforce; potentially a cause of lower morale and de-motivation
• Danger of lost skills for industries as a whole
• Business may be impacted by social problems associated with high unemployment (e.g. rising crime)
• Recruitment (in theory) becomes easier – there should be more applicants for each vacancy
• Lower staff turnover – employees less likely to be able to find other jobs, or want to move in an uncertain economic climate

Some business implications of falling / low unemployment:
• Consumers have more income = higher demand for income elastic goods
• Labour market “tightens” – increased upward pressure on wages / salaries
• Harder to recruit or expand without offering better worker packages – potentially affects ability to increase capacity
• Greater sense of job security and motivation in the workforce if the business is doing well

The appropriate response to changes in unemployment will depend on several factors, including:
• The nature / cause of unemployment (e.g. cyclical, structural, seasonal)
• The labour-intensity of the business
• The ability of the business to respond (resources, management structure etc)

Some typical responses are as follows:

An important evaluation point to remember is that many appropriate businesses actions will take place before a significant change in unemployment becomes apparent.  A business that is anticipating structural or cyclical changes in its business will ideally take action before those changes take full effect.


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