Sample Research Paper on Effects of Unemployment to the Economy

Effects of Unemployment to the Economy


The economic system of a certain region refers to the process of producing goods and services and conveying them to the consumer incorporating the economic agents. Nicola (2008) defines the economic agents as the individuals, firms, organizations or governments that influence the production and distribution of commodities. Various aspects are fundamental in influencing the economy of a region either positively or negatively, depending on the resultant effects. In light of this, unemployment is the situation in which people lack jobs in spite of their devoted efforts of looking for work. Unemployment occurs when the demand for job is very high as compared to the potential employees.  In most instances, potential employees are qualified and willing to indulge into the labor market, but they are not successful; hence, there is unemployment. For unemployment to occur, there have to be a surplus in the labor force. Nicola (2008) asserts that unemployment rate is a good measure that determines the health of an economy. Actually, lack of jobs has various effects to the society where some are positive and others are detrimental. Therefore, this research aims at identifying the specific effects of unemployment to the economy of a certain area. It aims at highlighting the precise impact that arises to an economic system due to the unemployment rate.

Background of the study

In late 2007 and early 2008, the unemployment rate was approximated at 10 percent in the United States. However, the great recession in 2008 pushed the figures to around 30% of unemployed Americans (Nicola, 2008). Long-term unemployment has increased from 30 percent to 40% from 2009 to 2013 and it has been associated with unfavorable economic status in the United States.  The United States Department of Labor asserts that the youths who are fresh from college aged 21-28 are the most affected in unemployment plaque. Most of the statistics argue that the great recession in 2008 affected the level of job availability in the United States negatively. As a result, the rate of unemployment adversely affected the economy of United States. Unemployment occurs in short-term or long-term categories depending on the duration. Short-term unemployment affects the economy for a while, but long-term unemployment has enduring effects. It is quite evident that most scholars and economists agree that unemployment impacts the economy. Therefore, the main purpose of this paper is to unearth the specific economic impacts that are attributed to unemployment.


Effects of unemployment to the economy

Negative effects

  • Increased government borrowings

The government acquires its revenue through collection of taxes from the public. Taxes are integral in financing government’s expenditure and in bringing development to the country. Employed people pay income taxes such as Pay As You Earn and Value Added Tax that gives the government income to finance its operations. When there is unemployment in huge portion of the population, the government has few sources of income and little revenue. The government has to finance its expenditure despite the lack of revenue from taxes. As a result, it considers monetary policies that amount to internal or external borrowing. This leads to increased government borrowing (PSNCR) because there are less people paying income tax and VAT.  Government borrowing leads to public debt that has negative impacts to the economy. Neugart(2002) asserts that many countries are facing big debt crisis that requires higher tax revenues to prevent a default in the system. Similarly, the government can be forced to borrow due to the expenditure on unemployment benefits paid to the unemployed people. People who are unemployed are entitled to certain benefits such as free or subsidized Medicare and accommodation issues that increase the government’s burden. The government is forced to borrow in order to substantiate its services to the people.

  • Increased taxation

As mentioned earlier, the government largely relies on taxes in financing its expenses and public service.  Part of the taxation is contributed by the employed people in both public and private sector. When there are a high number of people in employment, taxation is distributed evenly to a huge number of people; hence, each person contributes little money as taxes (Kreickemeier, 2006). On the contrary, unemployment increases the taxation burden to the few employed people. The government increases the taxation rates to gain maximum amount of finances from the few working people. A government needs to be financially stable to instill confidence to the commercial banks and the value of the stock market. When there is a default due to unemployment, the government pushes the burden to the few employed people by subjecting them to higher taxes. Similarly, the value added tax on consumer goods increases affecting the entire public.

  • Effects on spending power

The spending power of the public is determined by the amount of income at their disposal. As the level of income increases, the rate of spending increases leading to a better living standard in the society. Unemployment affects the source of income to an individual; hence, the spending power is adversely affected. The unemployed have little money at their disposal and they would rather save it and use it for the basic needs. They avoid excessive spending on better life and this might affect their quality of health and life at large. The spending power also influences the employed people retrogressively. Increased taxes make the employed people to shift their focus from spending to saving. They may also be affected by fear of losing their work, work insecurity; hence, they save their earnings for future purposes. Therefore, unemployment leads to a drastic reduction in the spending power among the employed and unemployed people (Nicola, 2008).

  • Productivity in a region

The Gross Domestic Product is the measure of a country’s economic productivity and it brings revenue to the country. GDP of a country is contributed by the working force of a certain country (Kreickemeier, 2006). Unemployment reduces the working force in a country thus affecting the productivity in the country. In some instances, the country is forced to import products and services that it could have produced on its own. Lack of jobs largely affects the productivity which in turn affects the GDP and the distribution of per capita income in the country. The government has to deal with the decreased production to enhance financial stability in the economic system.

  • Low investment

Investing refers to the act of putting finances into a productive venture that will bring profits or losses. In a healthy economy, there is a high rate of investment from the locals and foreigners. Unemployment is detrimental to the rate of investments because unemployed people lack money to invest. The little money at their disposal is used to finance their essential needs.

  • Community Ripple Effects

This is one of the overlooked effects of unemployment in spite of its significance to the economy. People may take mortgages, car loans among other properties with their salaries as the collaterals. When they get fired from their jobs, they may face difficulties paying their loans and this result to foreclosure and neglected properties.As a result, the value of the property falls drastically and the regulations of giving loans become rigid (Kreickemeier, 2006).

  • Deadweight loss of investment on human capital

Skilled human capital is the product of huge investment of impacting them with the requisite skills. It involves going to institutions of learning, incorporating research and development, and using government resources to train them. The expected results are that they are able to use these skills and knowledge to bring productivity in the region (Kreickemeier, 2006). On the contrary, unemployment deters hem from exploiting their skills; hence, the resources use to invest on human capital are totally wasted.

Positive effects

In spite of the numerous negative effects, there are still some notable positive effects of unemployment to the economy. For example, there is availability of cheap labor which is positive to the employer.In this case, firms enjoy a spell of unemployment because they are able to acquire employees with low salaries and wages. Similarly, due to the low spending power elicited when there is job scarcity; people tend to save the available finances to caution their future. High saving behavior is good to the economy because it enhances financial stability. Lastly, most people feel that they need to add their skills in order to competitive to the labor market. They usually go back to the institution of higher learning to increase their knowledge and expertise so that they may be able to compete for the available jobs.

Findings and Recommendations

As observed in this study, unemployment is detrimental to the economy since most scholars argue that high level of unemployment is costly to individuals and families. The availability of goods and services is halted causing numerous consequences to the living standards. According to Neugart (2002), unemployment is a contemporary phenomenon that has impacts on the economic, social, political, psychological and moral aspects of a region. It occurs when there is a mismatch between the supply and demand of jobs in a country. Based on the outlined positive and negative effects, the adverse effects outweighed the beneficial impacts.

Some of the recommendations of remedying this situation is encouraging the public to be innovative and create jobs instead of relying on employment. With the rise of the internet, there are numerous tasks that can be handled online creating an expansive platform for employment.  The government should strive on balancing the availability of jobs with the labor force. Similarly, labor can be exported to the countries that are experiencing labor shortages. Lastly, the public should cultivate the culture of saving and investing so that they can caution their future lives to avoid negative effects of unemployment.


It is quite evident that negative unemployment impacts are numerous and disastrous to the economy. It leads to fiscal costs to the government in higher benefit payments and lower tax revenues. Employees are subjected to higher taxes to cater for the lost taxes from the laid off people. The employed people have also an added task of taking care of people who have lost jobs. The productivity of a country as a whole is affected and the rate of GDP is eventually reduced (Nicola, 2008). This leads to a low quality of life and depleted standards of living in the society. Positive effects of unemployment are very minute and insignificant to the economy because they still have a negative impact. For instance, availability of cheap labor benefits the employers, but employees are disadvantaged. Unemployment results to economic crisis that is characterized by decline of economic activities, and consequences of family and national levels. Therefore, unemployment is a scourge that governments should find solutions to the labor economics in order to avoid the mentioned impacts to the economic syste


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Nicola Acocella, Giovanni Di Bartolomeo and Douglas A. Hibbs, [2008], ‘Labor market regimes and the effects of monetary policy’, in: ‘Journal of Macroeconomics’, 30: 134–56

U.S. Department of Labor, Bureau of Labor Statistics, “The Employment Situation: January 2008