Unemployment has wide implications. It doesn’t just have consequences on the individual. But, it also impacts society, business, and the economy. For example, unemployment causes:
- Higher poverty and crime
- Decrease in business revenue
- Increased financial difficulties
- Weak economic growth
Unemployment impacts individuals
The decline in disposable income is the first impact on individuals when they are unemployed. Then, with less income, they reduce consumption. Their finances may also be depressed from the inability to pay the installments, leading to bad credit.
Unemployment also has an impact on health. It increases stress and causes problems associated with it, such as insomnia, headaches, and high blood pressure.
Individuals lose income
Individuals earn income from salaries and wages. Those usually represent the main contributors. As a result, when individuals are unemployed, their income drops drastically.
Indeed, the unemployed may be able to collect from alternative sources. For example, they may have money from previously accumulated savings and earn regular income through coupons and rental income. However, these alternative sources may contribute relatively little to some.
Because there is no salary, unemployed individuals may only be able to rely on savings to cover essential expenses such as food and drink. And when they have no savings, they borrow money from relatives or friends. Or they rely on welfare payments from the government.
Reduced consumption expenditure
Income is positively correlated with consumption expenditure. An increase in income leads to more consumption, perhaps to a different degree. For example, high-income people spend more money on services – such as vacations – than goods.
Unemployed individuals find it difficult to fulfill their needs and want without income. Hence, they will shop more carefully and thoughtfully. For example, they cut spending on fewer essentials and focus on basic needs.
Quality of life deteriorates
The inability to make ends meet can lead to a decline in the standard of living. Unemployed individuals may only be able to meet basic needs. For example, their income is only enough to eat.
When individuals are unemployed for a long time, it is difficult to access quality education and skills. This situation resulted in their quality of life declining due to low skills. In fact, they can fall into the poverty trap.
Debts and defaults increase
The unemployed may rely on debt to meet some needs. And they keep borrowing, for example, from family or friends, as long as they haven’t found a new job. So, their debt piles up when they find a new job long enough.
In addition, because they do not have sufficient income, the unemployed find it difficult to pay installments. Consequently, they are more at risk of defaulting on their debts.
Household wealth decreases
Individuals accumulate wealth by setting aside money for savings. For example, they invest in real assets such as property and gold or financial assets such as stocks, bonds, and mutual funds.
But, being unemployed, individuals have no money to save. As a result, it reduces their ability to accumulate wealth for retirement and other purposes.
On the other hand, they may withdraw some assets to make ends meet as long as they have not found a new job. For example, they sell stocks or mutual funds they hold. As a result, their wealth falls during unemployment.
Decreased work skills
Individuals can lose their professional qualities when unemployed for a long time. For example, they do not have the opportunity to apply or improve their skills as they did when they worked.
In addition, while on the job, individuals can apply for training to acquire new skills or knowledge. However, the opportunity does not exist when they are unemployed.
Indeed, the unemployed can attend training through their own pockets. But, because their finances are deteriorating, chances are they won’t. As a result, unemployment reduces their employability.
The unemployment trap
Unemployment creates more individuals to enjoy being unemployed. For example, generous unemployment benefits create a moral hazard. On the one hand, it is key to support unemployed individuals to meet their basic needs. On the other hand, they become dependent on such programs.
Finally, unemployed individuals are too lazy to find a new job. They think they can make ends meet without finding a new job through unemployment benefits. Finally, such benefits increase the individual’s likelihood of remaining unemployed.
Individual health deteriorates
Unemployment has an impact on health, both physically and mentally. Being unemployed increases stress, causing other health problems associated with it, such as headaches, insomnia, high blood pressure, and heart disease. Smoking and being overweight are other common problems among unemployed people, leading to higher morbidity.
Those health problems can be more acute as individuals may reduce visits to the doctor and purchase medicines to reduce costs. Conversely, while working, individuals can rely on health insurance provided by the employer. Thus, they have better access to health care.
In addition, the unemployed also does not get other facilities to support their health. For example, they no longer get perks such as gym memberships or healthy food.
Unemployment impacts on business
A high unemployment rate indicates the economy is not fully utilizing its productive capacity. Some resources are idle – including labor – because the economy is operating below productive capacity. Consequently, the economy does not grow as fast as it could, perhaps even, on the contrary, down.
On the one hand, high unemployment means more labor is available in the labor market for recruitment.
But on the other hand, a high unemployment rate reduces consumer spending. As a result, the demand for goods and services falls. And businesses face deteriorating prospects for their earnings and profits.
Demand for goods and services decreases
When unemployed, individuals cut their consumption spending. They can only meet some needs and cut other less essential needs.
The cut in consumption spending resulted in businesses facing weaker demand, depressing their business performance. As a result, they generate lower sales because people spend less money on goods and services.
Durable goods producers may be the first to hit when the unemployment rate rises. Because their products are expensive and often financed by loans, households are more likely to reduce their demand for their products the first time they are unemployed.
Businesses facing financial difficulties
A decrease in the demand for goods and services causes a decrease in sales. As a result, businesses raise less money.
In addition, the decline in sales causes other problems, such as increased costs due to inventory build-up. Therefore, combined with the decline in revenue, it increased the pressure on profitability.
Further, the business may struggle to pay off debt as it accumulates less money and faces increased costs. This situation worsens their credit rating and increases the risk of default.
Long story short, the decline in demand not only worsened business performance. But, that, in the end, depressed the company’s financial performance.
Labor costs decreases
By laying off employees, the company reduces labor costs. But does it improve profitability? It depends on the impact on revenue and other expenses.
When the unemployment rate is high, businesses face pressure on their profitability. They face increased costs due to, for example, increased inventories and production inefficiencies. Thus, the reduction in labor costs may be disproportionate. As a result, their profitability is still depressed even though they have taken efficiency measures by reducing the workforce.
More workforce available for recruitment
An increase in unemployment means there is excess supply in the labor market. In other words, more people are available to hire if the business needs more employees.
In addition, as the labor market faces excess supply, wages tend to be pushed down, as the law of supply demand says. As a result, businesses may offer lower salaries when recruiting new staff.
Bad loans increase
The default risk is increasing in the business sector, not only in the household sector. This is because both sectors are experiencing financial difficulties. As a result, it increases bad loans, worsening the banks’ balance sheets.
Individuals face financial difficulties. They cannot pay their installments without income, leading to bad credit.
The same situation also occurs in the business sector. Companies struggle to raise money during high unemployment due to falling demand. They also have to face higher costs. So, if the cash reserves are sufficient, they can have difficulty paying back their debts.
Unemployment impacts on society
Unemployment not only affects individuals, but it can spread to the surrounding environment and cause social problems. Often, high unemployment rates in certain areas lead to high crime rates. For example, unemployed individuals commit crimes to earn money due to high demands to make ends meet. In addition, a poorer environment also amplifies unemployment’s social impact.
Unemployment is responsible for high poverty in several countries. For example, an increase in the poverty rate of 0.4 to 0.7 percentage points is associated with a 1 percentage point rise in the unemployment rate, data in the United States shows.
Unemployment causes many individuals to have incomes below the poverty line. Moreover, suppose their family relies on a few people to work and generate income. In that case, unemployment worsens the situation as their family cannot meet living expenses.
This problem can trigger the poverty trap. For example, unemployed families find it difficult to access training or education due to insufficient income. Finally, their children find it difficult to get a better future. As a result, poverty is passed down from generation to generation, leading to a poverty trap.
Crime rate rises
The unemployment rate is associated with property crime, i.e., crime to obtain money, property, or other benefits. During unemployment, individuals have financial difficulties in making ends meet. Thus, it increases their motives for committing crimes. Research shows a one percentage point increase in the unemployment rate causes the property crime rate to increase by 1.8 percent.
Unemployment impacts on the economy
Unemployment affects the economy in many ways. For example, a high unemployment rate lowers aggregate demand because households cut consumption spending. As a result, businesses cut their output as demand for goods and services falls.
In addition, the increase in unemployment also increases the fiscal burden. As fiscal social spending increases, the government collects fewer taxes as household incomes, and business profits decline.
The economy relies on labor to produce goods and services. So, when they are unemployed, they produce no output. As a result, gross domestic product (GDP), which measures the economy’s output, declined.
The unemployed have less income to pay taxes. They may still have income from capital gains or coupons. However, they no longer receive wages or salaries or other receipts such as bonuses. As a result, unemployment leads to less taxable income.
In addition to direct taxes, an increase in unemployment also reduces indirect tax revenues. For example, sales and value-added tax depend highly on demand for goods and services. Therefore, as demand declines, the government collects less indirect taxes.
Weak economic growth
Households don’t just provide labor and contribute to taxes. But, they are also major contributors to boosting economic growth. Their consumption spending contributes significantly to the economy. For example, it accounts for 60% of the United States GDP. Thus, household demand has a major impact on economic growth and, therefore, further job and income creation in the economy.
When unemployed, households reduce consumption spending. As a result, the economy loses its driver. In addition, declining demand for goods and services forces businesses to respond by lowering production. As a result, the economy’s output falls.
In addition, businesses also take efficiency measures. For example, they reduce the workforce, leading to more unemployment and worsening job and income prospects, further weakening demand and economic growth.
Public spending increases
The government allocates social spending to support the welfare of the underprivileged. The program increases during a tough economy – often synonymous with high unemployment.
Unemployment benefits are an example of such social spending. Indeed, it is important to temporarily meet basic needs as long as the unemployed individual has not found a new job. However, when the unemployment rate increases, the government has to allocate more spending, increasing the fiscal burden.
Typically, high unemployment occurs during a bad economy, such as a recession, during which taxes also fall. Consequently, an increase in unemployment and a decrease in taxes lead to a higher budget deficit. And the government must increase its debt to cover the shortfall, reducing the government’s ability to repay obligations.
Human capital decreases
Human capital represents the attributes in an individual that contribute to generating future benefits. It covers their knowledge, skills, education, and even health.
Many important competencies are developed on the job. For example, workers may apply for training to employers to improve their knowledge and skills. And when unemployed, they don’t get that kind of training.
As a result, workers can lose their skills when unemployed for a long time. Or, at least, they couldn’t upgrade their abilities and skills. As a result, their quality decreases.
This situation can be a problem in the long run. For example, if, at the same time, technology and industry change rapidly and require new skills, the unemployed find it difficult to find work because their skills are no longer relevant to demand. As a result, they become long-term unemployed (economists call it structural unemployment).
Structural unemployment creates deadweight losses to the economy because they continue to exist, even when the economy is operating at full capacity.