9, Discuss the possible consequences of unemployment (15) Introduction 1. Unemployment of labour occurs when people who are willing ard able to work, are actively seeking but unable ko find eenployment. ‘Wantage of Scarce Kesousecs 1. Unemployment constitutes « waste of the scarce resource of labour: With workers being unable to work, the econceny would be producing below full-employment output level, 2. With scference to Fig. 10 below, an economy without unemployment would be producing af a point slang the PPC, such as Point A — fully utilising all available resources (labour, especially) to produce the maximum number of capital anc consumer gocds in any particular combination, 3. However, given unemployment within an econamy, it would be producing point inside the Production Possibility Curve, such as polnt B — underutilising the available labour rescurces, and thereby producing at autput lavels below the maximum amount it could procaco. Fig. 10. 4 Production Possibilities Curve ilhistrating, Under-Productio. 4. Acca result, fewer gods ane produced In the econceny, satisfying fewer wants, fine lending to a lower standard of living,Fallin Economie Growth Unemployment means people do not enm income and therefore would be unwilling to spend as much as before on goods and seeviews. As thoir savings deplete, this will lead to greater fall in consumer expenditure, which is a component of the Aggrigate Demand (AD). At the same tisne, firms would also cut back on their investment as a restalt of lowered confidence in cconamy lending to reduced oxpected rates af returns on investment projects. Thus, the Investment companent of AD cinuld alse be falling, Diagrammatically, this i represented by the decrease in Aggmpate Demand froen AD, to ADs in Fig. 11 an the next page. . Concurrently, a high rate of long-term unemployenent would reduce both the quantity and quality of the labour force. The longer people remain tnemployvd, the gresier the chances of them losing thelr skills. The logs of proficiency in skills occurs because the tinemplayod ase ‘not actively using them. Hence, this results in lower productivity ard a fall in the quality af the labour oreo. Furthermore, unemployed warkors might become discouraged after a lang- period without being able to obtain a job. Should such discouraged workers vcense the jot search allogether, they effectively drap-oul of the labaur foros and become “pat econamically active", leading to a fall in the quantity of labour available, The fall in the quantity and «punlity of the labour farce, a Factor af Production, would shrink the productive capacity, reducing the fullemployment output lewel sof the econamy. As seen in Fig. 1] an the next page, the Long-Risn part of the Keynesian AS curve would shift leftwards from AS to AS, decreasing the full employment level af purput fram ¥; ta Yr.Fig. 11. Long-Term Unemployment leading toa decrease in AD and AS. 8. ‘The combined effect of a fall in AD and a fall in AS vrould lead to a drantic fall in the actual output of the econamy, from ¥i to Ya and a fall in the patential output ss well, fram Yj to Decline in the Gowemment's Budget 1. The unemployed do not earn an income and themfore would pay Ltele to no income taxes, This results in a loss of tax revenue for the gowernment. At the same time, the government wauld also have to incur a higher expenditure becuse of the increased amount of unemplayment welfare bervefits they have to give out 2 Thus, with tax revenue seduced and government expenditure incrensing, this places a strain on the government's budget. 3. Therefore, the goverment would have less fands available for alleenative uses suchas the provision af public goods like anti-dood systems and mecit goods like hospital care, This can lead to flooding, seduced quality or access te healthcare, ax well as other inconvenienees to living. Along with the fect that unemployment may also couse social problems such a6 rising crime rates, this moans that thene would be a fall in the noc-material standard of living, which concerns the less- tangible quatity of life factors.4. Additionally, this decline in the goveriment’s budget Is even more conceming because it hampers the government's ability bo enact policies thet deal with the unemployment, possibly allowing far a viciaus eycle to-take hold. ‘Resuced susceptibility to overheating 1. However, unemployment may also lead to some positive consequences, By definition, unemployment ecttails that there will bo some spare capacity in the economy: Hence, should AD increase in the future, it is not galng ta cause the economy to overheat, since firms can employ the idle resources in ander to expand production, 2. If there was aero sinemployment in the frst place, any increase in. ACI would lend {0 ievtense competition for labour, ciusing wages to increase intensely and Jeading to demand-pull lnflation and subsequent wage-price spirals, This can be unhealthy 25 money would be rapidly losing value and the situation can spiral into an economic crisis, ‘Spur Eniepmeneurship 1, By virtue of necessity, the unemployed may be foreed to find means and ways ta sam an income. This can load 40 some starting a business and eventually Dbecorning a successful entrepreneur that in tum contributes to jobs for othem. As enizepreneurship is a factor of production, the spurring of entrepreneurship cary thus result in greater economic growth in the long-term. ‘Ald in Economie Restructuring 1, From time to time, there may be some need to restructure the ecomomy away from certain sectors to other new sectors, For example, the Government may sew it fit to diversify the econoeny from being agricuture-dependent and hence decide to build up 2 manufacturing base. Such cconoenie plans could be hampened if all workers ane alrady employed. Now, the unemployed can be possibly sent for training, sponsored by the Government and with some training allowance eared. In this way, the skills of the workforce will be increasing, maklng it Possible to altract foreign direct investments {since relevant skills are available}, and build ypa manufacturing base, aiding in the ecanomic ralructuring efforts.‘Conchuding Section 1. Overall, unemployment beads to far mone severe negative consequences than there are positive ones, 2 That is why Governments in general have the macroeconomic goal of full employment, 3. The pasitive impacts af unemployment (achievement of economic restructuring, ‘increased entreprencurship and reduced susceptibility to owerheating) can be brought about through deliberate government policies, without having to vexperience the consequences associated with greater unemployment,