Causes & Impact of Unemployment
Economics: IB Diploma, topic 2.3.4
Causes of Unemployment
Both demand-side and supply-side factors affect the levels of employment and unemployment in an economy:
Demand-side factors
- Demand-side in the labour market refers to the demand for labour from firms.
- Demand-side factors affecting employment and unemployment include:
- Health of firms, e.g. profit levels, demand for goods.
- Confidence of firms.
- Overall strength of economy.
- Government intervention to encourage hiring.
- Level of labour market regulation/costs of hiring.
Supply-side factors
- Supply-side in the labour market refers to the supply of labour by workers.
- Supply-side factors affecting employment and unemployment include:
- Labour market flexibility, e.g. trade union strength.
- Skills of workers.
- Geographic mobility of workers.
- Occupational mobility of workers.
Consequences of Unemployment
Persistent high levels of unemployment can have many negative effects upon an economy and the workers within it:
Living standards and inequality
- It is likely that those unemployed will suffer a dramatic fall in their standard of living.
- High levels of unemployment may also increase inequality within an economy - those without a job 'falling behind' those who are earning and also potentially disadvantaging future generations who grow up in communities without work.
Fiscal issues
- 'Automatic stabilisers', such as unemployment benefits, would increase government spending when unemployment is high.
- The government would also receive less income tax and so would not have as much revenue to invest in public services to address the problems caused.
Social issues
- High levels of unemployment can also be associated with increased rates of crime and other such activities.
- These cost the government through expenditure on policing and also give rise to negative externalities.
Reduced output
- If unemployment is not due to workers being replaced with capital, it is likely that real GDP will fall with increased unemployment.
- Reduced confidence and multiplier effects could magnify the negative impact upon the economy.
Test yourself on Causes & Impact of Unemployment
Which of the following are demand-side factors of unemployment?
Which of the following is a supply-side factor in the labour market?
Which of the following is a consequence of higher unemployment?
What are unemployment benefits for the economy?