1. Economics - Notes for Teachers
Effects of Unemployment
Effects of Unemployment
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2. 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.

3. 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.

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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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