Economics - Notes for Teachers Effects of Unemployment Effects of Unemployment Academic PowerPoint

Effects of Unemployment The effects of unemployment are often categorised into: a) Output effects on income and output b) Distributional effects on certain groups in society.

Output Effects Unemployment means that resources are underutilised and output therefore must be less than with full employment. This can be shown on the production possibility frontier on the next slide.

Output Effects The production possibility frontier shows the lost output as a result of unemployment, represented by the GDP gap. Capital Goods Consumer GDP Gap UE Full employment

Output Effects The lost output involved is the cost in terms of welfare, lower income and therefore living standards. Aggregate demand is reduced and hence the rate of economic growth.

Output Effects As plant and equipment become obselete during unemployment, the unemployed workers lose skills and are unable to gain new ones. Hence unemployment leads to an erosion of the skills base and therefore reduces the quality of the workforce. In addition, the shortage of skilled labour may actually lead to wage inflation due to a lack of supply over demand for suitably qualified employees.

Output Effects Apart from lost output, unemployment places a direct cost on the economy. Government revenue falls due to lower tax receipts, and there may be an increase in spending on welfare and social security.

Output Effects Though welfare and social security benefit the recipient, there may be a fall in the spending allocated to areas which would bring greater long term benefits to the economy. Such areas include education, youth programs and capital works.

Distribution Effects Unemployment impacts more severely on certain groups (the unskilled, young elderly) than others. There are a number of social effects which are often associated with higher unemployment.

Distribution Effects These social effects include increased crime rates, divorce, suicide and drug abuse. These social effects are particularly real for those who have been long-term unemployed.

Distribution Effects The link between social effects and unemployment has a direct relationship as can be seen in the diagram on the right. Social effects Unemployment

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