Question

Explain the cost of unemployment to the economy

Answer 1

The economic and social costs of unemployment include Personal costs to the unemployed (loss of income, loss of sense of worth, reduced on-the-job training) Policy costs (loss of tax revenue and higher benefit expenditure) Costs to society in general (social issues, isolation, loss of GDP).

Loss of earnings to the unemployed.. Unemployment is one of the UK's most important sources of deprivation. Long-term unemployment will drive households into debt, and boost relative poverty levels.
Possible homelessness. Loss of income will leave people without enough money to cover the costs of housing. Rises in joblessness also worsen homelessness rates.
Harms the prospects for the future. Future unemployed people will find it harder to get jobs

Lost human capital. If people are out of work, they miss 'on-the-job training' This is a vital component of human capital and labor skills; high unemployment rates can reduce productivity in labour. They miss out on the new working practices and developments if anyone is out of work for two years. Being unemployed can also affect the unemployed's confidence and they will become less employable in the future.

Increased borrowing by Government. Higher unemployment would lead to a decrease in tax revenue due to less people paying income tax and thus less spending (hence lower VAT). The government would therefore have to spend more on joblessness and related benefits. Not only does the government pay unemployment insurance, but a family who has unemployment would be more likely to receive housing and income support.

Lower Economic GDP. High unemployment implies that the economy runs below maximum potential and is inefficient; this will result in reduced production and profits. The unemployed are also unable to buy as many goods, therefore they will contribute to lower expenditure and lower output. An rise in unemployment can have a negative effect on multipliers.
Rise in social issues. High unemployment areas (particularly youth unemployment) tend to get more crime and vandalism. This may lead to isolation and difficulties in the social integration of young unemployed people.