Unemployment in US on the rise since 2007 is at accelerating rate in 2008
Unemployment in UK had reached all time high of 6%. Also going up at accelerating rateImplications of unemployment
(1) Fall in real GDP. Labours, just like land & capital is considered as factors of production. Higher unemployment rate means lesser labours are being hired in the market. Therefore this necessarily translates to lesser goods & services produced in an economy. The fast rising unemployment in major developed economies such as France, Germany, US, UK & Japan largely explains why these countries are already officially in recession (unemployment & contraction in GDP are inter-related actually). Recession is defined as 2 successive quarters of negative growth
However, if job losses are due to firms becoming more capital-intensive (use more machineries), then real GDP may not fall
(2) Loss of income. Unemployed people may have lower standard of living. This is because, they no longer have sufficient means to maintain their living style as before. Even if they get Jobseeker’s Allowance it is of minimal amount & it actually erodes their purchasing power. Although one could argued that sometimes the unemployment benefit (which is not same to every individuals) provides more income than working & the increased free time may be considered more valuable than working, rest assured this falls into minority case
(3) Negative multiplier effect. The jobless state could eventually spread into the whole economy. Think of this. Woolworths is about to go into administration. It is going to shut all its 807 stores with the workforce of 27, 000 people in January if it can’t find a suitor. Say all these workers are laid off simultaneously. It will immediately cause a fall in consumption which triggers a contraction in real economy. Firms earn lower profit or even losses or even go bankrupt. In return, they are firing workers too. The cycle just repeats itself
(4) Loss of tax revenue. Unemployment will immediately cause a fall in direct tax & indirect tax. As lesser number of people is working, government receives lesser income tax. As firms felt the impact of negative multiplier effect, they make lesser profit or losses. So government collects lower corporation tax. Also since lesser people spend money onto buying goods & services, there would be fall in VAT
What government can do is increasing the tax onto those existing workers or cut government spending. Rest assured, both are viewed as politically unpopular stance.
(5) Increase in unemployment benefits. This resembles an opportunity costs of how government can spend their money. It is argued that those monies are better spent productively to stimulate the economy by creating employment through the building of schools, hospitals, motorway, infrastructures, telecommunications etc. Workers which receive ‘the dole’ may become complacent & might just rely on the benefit rather than making an effort to search for jobs
(6) Social costs. Being jobless, can pressurised an individual to commit offenses such as snatch theft & robbery. If prolong, other things may happen. In the period of Great Depression in 1929-1939 people are unemployed so long that the suicidal rate actually increased. Also being jobless for so long can degrade an individual self-esteem & fall in productivity. From other angle, children from unemployed households often had poorer education & hold fewer skills on the average, upon entering work
(1) Fall in real GDP. Labours, just like land & capital is considered as factors of production. Higher unemployment rate means lesser labours are being hired in the market. Therefore this necessarily translates to lesser goods & services produced in an economy. The fast rising unemployment in major developed economies such as France, Germany, US, UK & Japan largely explains why these countries are already officially in recession (unemployment & contraction in GDP are inter-related actually). Recession is defined as 2 successive quarters of negative growth
However, if job losses are due to firms becoming more capital-intensive (use more machineries), then real GDP may not fall
(2) Loss of income. Unemployed people may have lower standard of living. This is because, they no longer have sufficient means to maintain their living style as before. Even if they get Jobseeker’s Allowance it is of minimal amount & it actually erodes their purchasing power. Although one could argued that sometimes the unemployment benefit (which is not same to every individuals) provides more income than working & the increased free time may be considered more valuable than working, rest assured this falls into minority case
(3) Negative multiplier effect. The jobless state could eventually spread into the whole economy. Think of this. Woolworths is about to go into administration. It is going to shut all its 807 stores with the workforce of 27, 000 people in January if it can’t find a suitor. Say all these workers are laid off simultaneously. It will immediately cause a fall in consumption which triggers a contraction in real economy. Firms earn lower profit or even losses or even go bankrupt. In return, they are firing workers too. The cycle just repeats itself
(4) Loss of tax revenue. Unemployment will immediately cause a fall in direct tax & indirect tax. As lesser number of people is working, government receives lesser income tax. As firms felt the impact of negative multiplier effect, they make lesser profit or losses. So government collects lower corporation tax. Also since lesser people spend money onto buying goods & services, there would be fall in VAT
What government can do is increasing the tax onto those existing workers or cut government spending. Rest assured, both are viewed as politically unpopular stance.
(5) Increase in unemployment benefits. This resembles an opportunity costs of how government can spend their money. It is argued that those monies are better spent productively to stimulate the economy by creating employment through the building of schools, hospitals, motorway, infrastructures, telecommunications etc. Workers which receive ‘the dole’ may become complacent & might just rely on the benefit rather than making an effort to search for jobs
(6) Social costs. Being jobless, can pressurised an individual to commit offenses such as snatch theft & robbery. If prolong, other things may happen. In the period of Great Depression in 1929-1939 people are unemployed so long that the suicidal rate actually increased. Also being jobless for so long can degrade an individual self-esteem & fall in productivity. From other angle, children from unemployed households often had poorer education & hold fewer skills on the average, upon entering work
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