ECONOMIC CONSEQUENCES:

 

Labour is a scarce resource and if there is unemployment, it mean that labour is not being fully utilised therefore there a waste of resources. (Market Failure)

You can show this through a simple AS-Level PPF/PPB diagram.  Just mark the diagram anywhere INSIDE the PPB and it would show that there is spare capacity

 

An increase in unemployment will lead to a fall in spending because people will have less money and will therefore save rather than consume to ensure stability.  This is due to the fall in consumer confidence.  This will ceteris paribus, reduce AD.

There is also a wastage of resources that are invested in training and education workers.  The longer that people spend out of work, the more their motivation will fall and their skills would ‘expire’. [CHAIN OF ANALYSIS]

 

The government deficit will all also increase do to having to spend more on Job Seekers Allowance and other benefits.  Government revenue will due to the fall in money being generated via income taxes, national insurance and VAT.

 

The longer that people stay out of work, the more their skills and motivation will fall.  Skills will become eroded as they will not be put into practice and people will become lazy.  This would lead to further structural unemployment due to not having satisfactory jobs to work in certain sectors.  It will also lead a rise in the natural rate of unemployment.

 

This could lead to ‘The Hysteresis Effect’ which, takes place when for example: Employment will just lead to further long term unemployment due to the loss of skills and motivation.

 

SOCIAL COSTS OF UNEPLOYMENT

 

High level of unemployment could lead to a range of negative externalities for example:

• Crime

• Increased divorce rates

• Poorer health

Overall fall there will be a fall in living standards.

 

POSSIBLE BENEFITS OF UNEMPLOYMENT:

 

Although unemployment costs are considered to outweigh any benefits by politicians and economists, there could still be some:

Firms may find that high unemployment could help keep wages down.  This is because of the low bargaining power of workers to negotiate higher wages.  This would help to reduce inflationary pressure as price of goods and services will not have to rise at a fast pace. Unemployment may also mean a slower growth of consumption and production could reduce environmental damages as well as the pressure on non-renewable resources.