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Costs of Unemployment
Unemployment is one of the significant issues for any economy and country. With its presence, it becomes almost impossible for an economy to successfully grow and prosper. Unemployment not only affects the overall national economy and the level of economic activities in a country, but it also has several damaging social effects. All these damages are also commonly known as ‘costs of unemployment’.
These costs of unemployment can be social, fiscal and economical. In order to study them all, we divide costs of unemployment into following sub-categories.
1. Costs of Unemployment to the Unemployed:
Unemployment, apart from damaging the overall economy of a country, brings severe negative effects to the unemployed person. Human capital is an important aspect for any economy, which is why it becomes all the more important to know the possible damages to the unemployed person.
Following are the costs of unemployment to the unemployed:
- The unemployed suffers a lot of status.
- The unemployed are more likely to experience divorce, nervous breakdowns, bad health, and are more likely to attempt suicide than the rest of the adult population.
- The longer time a person has been out of work, the harder they are likely to find a job as their skills have become rusty.
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2. Costs of Unemployment to the Economy:
The other most obvious cost of unemployment is suffered by the economy itself. If there is an unreasonably high level of unemployment, the economy suffers on various fronts. Following are the two most negative outcomes or costs of unemployment to the economy:
i. Lost Output of Goods and Services:
An economy with high unemployment produces within its production possibility frontier. Unemployment causes a waste of scarce economic resources and this wastage can never be recovered again.
ii. Fall in Human Capital:
Workers, who are unemployed for a long period of time, become deskilled. This reduces their chances of getting employment in the future, which increases the burden on government and the economy of the country. Moreover, unemployment also wastes some of the resources used in for the training of the worker.
3. Fiscal Cost to the Government:
For an economy that does not fully employ its labor force, it is obvious to suffer many fiscal losses as well. Following are the fiscal costs to the government that is caused by high unemployment.
- When individuals are unemployed, they receive unemployment benefits. Moreover, they also do not pay any income tax. This results in a negative overall balance.
- As unemployed people spend less, they also contribute less to the government in the indirect taxes. This, in turn, becomes a serious fiscal cost to the government.
- The rise in the government spending along with the fall in tax revenues may result in a higher government borrowing, which is seriously detrimental for any economy.
4. Social Costs of Unemployment:
As mentioned earlier, high unemployment does not only bring fiscal and economical damages, but it also has several negative effects on the social aspect of a country. As unemployment increases, crimes also increase. This increment in criminal activities affects all the people living in the economy. Moreover, an increase in divorces, worsening health and lower life expectancy are also observed due to unemployment. These are only some of the social costs to be mentioned.
Unemployment is always one of the biggest worries for any economy. Because of a high unemployment rate, the economy suffers on more than one front. Although the true estimate of the damage can never be predicted, the above-mentioned points are some of the biggest costs of unemployment.
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