What this lesson teaches
I can explain the effects of unemployment on individuals, firms, the government and the economy.
Syllabus K343, 4.6.4. Consequences of unemployment: consequences of unemployment for the individual, producers/firms, the government and the economy
Make a guess
A factory closes and 2,000 workers lose their jobs. Who else loses out?
- The workers who lost their jobs, and nobody else.
- Nearby shops, the government and the whole economy.
- The factory owner, who loses the profits the factory made.
Show the answer
Nearby shops, the government and the whole economy.
Shops lose sales, the government collects less tax and pays more support, and the output those workers could make is lost.
Unemployment costs individuals their income, firms their customers, governments their revenue, and the economy its output.
For the individual: loss of income, so living standards fall. Long spells out of work can cause stress, ill health and loss of skills, making it harder to find a job later.
For firms: unemployed people spend less, so firms that sell to consumers lose sales. But firms may find it easier to hire workers, and may be able to pay lower wages.
For the government: it collects less income tax and less tax on spending. It must spend more on unemployment support and retraining. Its budget moves towards deficit.
For the economy: output is lost, because idle workers could have been producing. The economy produces inside its PPC. High unemployment can also increase crime and social tension.
- Individual
- Lost income, stress, loss of skills.
- Firms
- Lower sales; easier hiring.
- Government
- Less tax revenue, more spending on support.
- Economy
- Lost output; production inside the PPC.
Worked example: Tracing the costs of rising unemployment
Suppose 20,000 workers lose their jobs when a car plant closes.
- Individuals: their incomes fall, and some struggle to pay loans.
- Local firms: shops near the plant lose sales.
- Government: tax revenue falls and spending on support rises.
- Economy: the output those workers could have produced is lost.
Watch out for this
Unemployment only harms the people who lose their jobs.
Unemployment also harms firms through lower sales, the government through lower tax and higher spending, and the whole economy through lost output.
Check your understanding
How does high unemployment affect the government's budget?
- The budget is not affected, because benefits are paid by employers.
- Tax revenue falls and spending on support rises, so the budget worsens.
- Tax revenue rises, because more people need support and taxes go up to pay for it.
Show the answer
Tax revenue falls and spending on support rises, so the budget worsens.
Right. Both sides of the budget move against the government.
Check your understanding
Which is a cost of high unemployment for the government?
- Higher profits that firms must report
- Faster inflation that it must control
- Less tax revenue and more spending on support
- A shortage of workers for public services
Show the answer
Less tax revenue and more spending on support
Right. Jobless people pay less income tax and spend less, and many need help.