Negative Effects of High Unemployment in an Economy

Discuss the Negative Effects of High Unemployment in an Economy Unemployment refers to people who are able, available and actively seeking for a job in the last four weeks. It is important to know that these people are prepared to start work within the next two weeks but are not working at the moment. There are some negative effects that result from an economy experiencing high unemployment rates. If more people were unemployed, the government would have to provide more benefits for them, as they have no source of income. A smaller amount of workers also means that the government receives a lower amount of tax revenue. Also, more money to be spent on crime rate and retraining those deskilled workforces. Therefore, there is a budget deficit as government spending is greater than tax revenue. This leads to less funds being available to spend on improving the economy. It may also force the government to borrow money to finance the deficit, which will accumulate a high national debt with more interest payment. However, this depends on how the economy's budget position is to begin with. For example, if the government were at budget surplus earlier then the decrease wouldn't be as significant. As well as that, the government could introduce changes such as raising the rate of income tax from employed people to compensate the loss of tax revenue due to high unemployment. Secondly, if an economy is facing high unemployment rates, it means that less goods and services are being produced, as there is less productive capacity being used. This lowers the output, and therefore growth, of the economy. As well as that, household income will decrease as less people are working and earning money in a household. This will lead to less consumption, as there is a lack of disposable income. Due to there being a positive relation between consumption and investment, both decrease. This causes aggregate supply and aggregate demand to shift to the left, lowering the growth of the economy. It also means that there is less availability of national income to finance economic development. However, if the high unemployment is due to automation, it means more goods are produced despite fewer workers being hired. As well as that, if any excess production is available to be exported to foreign countries, regardless of less demand domestically, then the aggregate demand will increase, as export is a component of aggregate demand. Lastly, a negative impact of high unemployment results in a deskilled workforce, which decreases productivity. A high crime rate may also push away potential FDI. Therefore, there will be fewer injections in the circular flow and so GDP will rise at a slower rate. This in turn slows down both economic growth and development, which results in poor confidence levels and poor national sovereignty. However, these factors might actually attract FDI as you do not need to pay higher wages to workers and wider pool of worker is available with lower trade union power. FDI will bring in more jobs within the country and help to improve infrastructure too. This is because MNCs require a low skilled workforce at low wage costs. To conclude, rising unemployment is not a good economic indicator where as our target is to achieve low unemployment rather than full employment. Most Importantly, youth unemployment and long-term unemployment result deskilled workforce and hysteresis effects. Therefore, some countries such as the UK have tackled this by introducing community services that people have to complete in order to be eligible for benefits. This will not only improve social services and reduce the social cost but also keep the staff skilled.