costs and benefits of unemployment

• Macro objective for unemployment

  Low unemployment or full employment
• When unemployment gets high


  The costs outweigh the benefits
• Lost output when there is unemployment of labor in the economy
• The economy is operating within its productive potential, inside its PPF curve
• This means the maximum production of goods and services is not taking place
• Reduced production of goods and services

  Lowers consumers' and households' ability to access goods and services, and reduces their living standards
• Reduced production of goods and services

  Constrains economic growth
• Government finances take a big hit on the tax revenue side
• Income tax revenues and VAT revenues come down due to less spending on goods and services</b>
• There is less corporation tax revenue due to lower firm profits
• There is more government spending on benefits and to deal with the costs of high unemployment
• More government spending on areas like police, military, healthcare, judiciary services to deal with the social costs of high unemployment
• Budget deficits and national debt tend to rise


  This has implications for the whole economy
• Social costs of unemployment include greater homelessness, deprivation, poverty, crime, riots, physical and mental health issues, family/marital breakdown
• These social costs are negative externalities that affect the whole of society and burden government finances
• Individuals who are unemployed lose their income source, which can drive them into poverty and lead to further issues
• Hysteresis


  When unemployment becomes long-term, workers lose skills and become unemployable, reducing the labour force and long-term growth
• Hysteresis is the worst cost of high unemployment
• Benefits of unemployment


  • Firms have a greater pool of workers to choose from, allowing them to select the most productive workers
  • Keeps a lid on wage rises and inflation
  • Can improve the current account position
• Unemployment at the natural rate is generally fine, but if it goes beyond the natural rate the costs outweigh the benefits
• Long-term unemployment (over 1 year) is very harmful due to the risk of hysteresis
• Types of unemployment


  • Structural unemployment is the worst, especially occupational immobility
  • Cyclical unemployment is not as bad
  • Frictional unemployment is quite healthy
• Youth unemployment is especially concerning as they are more liable to suffer from long-term unemployment and hysteresis