What this lesson teaches
I can explain how weak growth, unemployment and unstable prices hurt households, firms and governments.
Syllabus 8843, 3.2.2(b). Macroeconomic Issues: Consequences of undesirable economic growth, unemployment and price instability on the standard of living and its implications for economic agents
Make a guess
Who loses when 5% of the workforce is unemployed for a year?
- Few people in the long run, because most find jobs later.
- The workers, the whole economy and the government.
- The unemployed workers and their families, who lose income.
Show the answer
The workers, the whole economy and the government.
Workers lose income, the economy loses output it can never get back, and the government collects less tax and spends more on support.
Unemployment costs households income, the economy lost output and the government tax revenue.
Households: unemployed workers lose income, so their material living standards fall. Long-term unemployment can also cause stress, poorer health and loss of skills.
The economy: unemployed workers could have produced goods and services, so output is lost for good. The economy produces inside its PPC.
The government: it collects less income tax and spends more on support schemes, which strains the budget.
Long spells out of work cause lasting damage: skills become outdated and workers may give up looking, which lowers future productive capacity.
- Households
- Lost income, stress, lost skills.
- Economy
- Lost output.
- Government
- Less tax, more spending.
Worked example: New jobs or people giving up?
A town has 90 employed and 10 unemployed. In outcome A, 5 find jobs. In outcome B, 5 stop looking for work.
- A: employment rises to 95; unemployment rate 5%.
- B: employment stays at 90; unemployment rate about 5.3%.
- Both rates fell, but only A created jobs.
- In B, the 5 who gave up still bear the costs of being out of work.
Watch out for this
Unemployment only affects the unemployed.
The whole economy loses output, the government loses tax revenue, and firms lose sales as spending falls.
Check your understanding
Why does long-term unemployment reduce future growth?
- It raises inflation, because firms must pay more to find workers.
- Workers' skills become outdated, lowering productive capacity.
- It raises the wages of those in work, so firms invest less.
Show the answer
Workers' skills become outdated, lowering productive capacity.
Right. Lost skills reduce the quality of the workforce.