economic costs of unemployment
Most economists agree that high levels of unemployment are costly not only to the individuals and families directly affected, but also to local and regional economies and the economy as a whole. We can make a distinction between the economic costs arising from people out of work and the social costs that often result.
Lost output of goods and services
Unemployment causes a waste of scarce economic resources and reduces the long run growth potential of the economy. An economy with high unemployment is producing within its production possibility frontier. The hours that the unemployed do not work can never be recovered.
But if unemployment can be reduced, total national output can rise leading to an improvement in economic welfare.
Fiscal costs to the government
High unemployment has an impact on government expenditure, taxation and the level of government borrowing each year
An increase in unemployment results in higher benefit payments and lower tax revenues. When individuals are unemployed, not only do they receive benefits but also pay no income tax.
As they are spending less they contribute less to the government in indirect taxes.
This rise in government spending along with the fall in tax revenues may result in a higher government borrowing requirement (known as a public sector net cash requirement)
Deadweight loss of investment in human capital
Unemployment wastes some of the scarce resources used in training workers. Furthermore, workers who are unemployed for long periods become de-skilled as their skills become increasingly dated in a rapidly changing job market. This reduces their chances of gaining employment in the future, which in turn increases the economic burden on government and society. See the revision page on long term unemployment
SOCIAL COSTS OF UNEMPLOYMENT
Rising unemployment is linked to social and economic deprivation - there is some relationship between rising unemployment and rising crime and worsening social dislocation (increased divorce, worsening health and lower life expectancy).
Areas of high unemployment will also see a decline in real income and spending together with a rising scale of relative poverty and income inequality. As younger workers are more geographically mobile than older employees, there is a risk that areas with above average unemployment will suffer from an ageing potential workforce - making them less attractive as investment locations for new businesses.
The duration of unemployment affects the economic and social costs
It is clear therefore that unemployment carries substantial economic and social costs. These costs are greatest when long-term structural unemployment is high. Indeed many government focus their labour market policies on improving the employment prospects of the long-term unemployed.
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