- Both unemployment and inflation create significant problems for an economy, but their impacts differ in severity and nature.
- Understanding which causes more economic damage helps policymakers make better decisions when facing trade-offs between the two.
Costs of unemployment
- Loss of GDP: when workers are unemployed, they are not producing goods and services, causing the economy to operate below its potential output level.
- Reduced tax revenue: job losses mean individuals pay less income tax and spend less, reducing consumption tax collection.
- Higher government spending on welfare: as more people become unemployed, the government must increase spending on unemployment benefits and social support programs, adding strain to public finances.
- Skill erosion and lower employability: long-term unemployment causes workers to lose job-specific skills and fall behind industry developments, making it harder for them to find work again.
- Lower consumer spending: unemployed individuals have less disposable income, while employed workers may increase their savings out of fear of job loss, leading to reduced overall consumption and slower economic growth.
Overall, high unemployment affects businesses, individuals, and the government, reducing overall economic efficiency and growth potential.
