Cambridge IGCSE Economics 0455 – Government and the Macro‑economy: Employment and UnemploymentGovernment and the Macro‑economy – Employment and Unemployment
Learning Objective
Explain the consequences of unemployment for the individual, producers/firms, the government and the overall economy.
Key Definitions
Types of Unemployment (Brief Overview)
- Frictional – short‑term, due to job search and movement.
- Structural – mismatch between skills and job requirements.
- Demand‑deficient (Cyclical) – caused by insufficient aggregate demand.
- Classical – wages above equilibrium causing excess supply of labour.
Consequences of Unemployment
1. For the Individual
- Loss of Income: Reduces household consumption and savings.
- Reduced Standard of Living: May lead to poorer health, nutrition and housing.
- Psychological Effects: Increased stress, loss of confidence, possible rise in crime.
- Skill Deterioration: Long periods out of work can erode human capital.
2. For Producers / Firms
- Reduced Consumer Demand: Lower household spending lowers sales revenue.
- Higher Turn‑over Costs: Firms may need to recruit and train new staff when the economy recovers.
- Wage Pressure: In high unemployment, firms can keep wages low, but may also face reduced morale and productivity.
- Potential Over‑capacity: Under‑utilised factories and equipment increase average costs.
3. For the Government
- Higher Welfare Expenditure: Increased spending on unemployment benefits, job‑centre services and training programmes.
- Reduced Tax Revenue: Fewer people paying income tax and lower corporate profits.
- Fiscal Deficit Pressure: Greater outlays combined with lower revenue can widen the budget deficit.
- Political Implications: Public dissatisfaction may affect electoral outcomes and policy choices.
4. For the Economy as a Whole
- Lower Aggregate Demand (AD): Unemployed households spend less, shifting the AD curve leftward.
- Potential Deflationary Pressures: Reduced demand can lead to falling prices.
- Loss of Output: Real GDP falls below its potential level, creating a negative output gap.
- Increased Inequality: Unemployment often hits low‑skill workers hardest, widening income gaps.
- Long‑run Growth Impact: Persistent structural unemployment can reduce the economy’s productive capacity.
Summary Table of Consequences
| Stakeholder | Key Consequences | Short‑term Effects | Long‑term Effects |
|---|
| Individual | Loss of income, reduced living standards, skill loss | Lower consumption, stress | Human capital erosion, chronic poverty |
| Firms | Reduced demand, over‑capacity, wage pressure | Lower sales, cost‑cutting | Higher recruitment costs, lower productivity |
| Government | Higher welfare spending, lower tax receipts, fiscal deficit | Budgetary strain, policy pressure | Potential debt accumulation, political instability |
| Economy | Lower AD, output gap, possible deflation, inequality | GDP below potential, unemployment spiral | Reduced growth potential, structural imbalances |
Suggested diagram: AD–AS model showing a leftward shift of AD due to high unemployment, resulting in lower output (Y) and price level (P).
Key Points to Remember
- Unemployment affects not only the job‑seeker but also firms, government finances and macro‑economic stability.
- Short‑run impacts are mainly demand‑driven, while long‑run effects often involve loss of skills and potential output.
- Policy responses (fiscal stimulus, training programmes, wage subsidies) aim to mitigate these consequences.