Consequences of unemployment

The costs and consequences of unemployment for the whole economy

Unemployment is bad for the economy as a whole, largely through the waste of human capital. When workers are unemployed, not all the economy's productive resources are used to produce output, which, if produced, could add to the material standards of living and economic welfare of the whole population. Instead, the economy produces inside its production possibility frontier and fails to operate to its potential.

Unemployment is also one of the factors that reduce an economy's international competitiveness. High unemployment can reduce incentives for firms to invest in new state-of-the-art technologies that generally lead to increased export competitiveness. The under-investment associated with high unemployment also results from a reduced need to invest in capital-intensive technologies when there are plenty of unemployed workers who are not only available, but cheap to hire. In these circumstances, employers continue to use labour-intensive but antiquated technologies, particularly when high unemployment accompanies a stagnant economy, low profits and a climate of business pessimism.

Under-investment can also be caused by the higher business taxes firms may…