Cost of unemployment

Fiscal cost to the government

Unemployment leads to higher government expenditure, taxation and the level of
government borrowing each year. Government have to pay for unemployment
benefits, food assistance, and health service to support the unemployed. Individuals
who are unemployed receive benefits but pay no income tax. Furthermore,
government now collects smaller amount of income tax, no longer collecting the same
levels of income tax as before, because the unemployed have no job so they can avoid
income tax. Besides, they contribute less to the government in indirect taxes when
they spend less. This situation forces government to borrow money or cut back on
other spending. The rise in government spending along with the fall in tax revenue
may result in higher government borrowing requirement, known as a public sector
net cash requirement. For example, the ESEE estimated that jobless with nearly 2
million people out of work, costs the Greek economy $5 billion annually.
Cost to the economy
Unemployment causes a waste of scarce economic resources and reduces the long run
growth potential of the economy. Country has lower GDP, it is below full capacity
and is inefficient, leading to lower output and incomes because labour resources are
not actively used. Okuns law states that a percentage increase in unemployment
causes approximately 2 percent fall in GDP. For example, recession deepened into
1992 in Australia, the unemployment rate which increases 2.3 percent causes the
output loss was about 4.95 percent.
Cost to the society
Rising unemployment is linked to social and economic deprivation, tend to have
higher crime rates and other social discontents. Absent of a wage-paying job, people
may turn to criminal to meet their economic needs or alleviate boredom. For example,
during hard time that hits Europe from 1975-1995, unemployment among uneducated
youth causes a massive tendency for theft and violence. In particular in France, its
crime rate soared like never before.
Cost to individual
Studies have shown that prolonged unemployment harms the mental health of
workers and can actually worsen physical health and shorten lifespan. By the way,
when a person loses his or her job, there is an impact on that persons standard of
living. Prior to the Great Recession, the average savings rate in the US has been
drifting down toward zero, and there are reports that the average person is only a few
weeks away from serious financial trouble without a paying job.