2.1.3 Consequences of Unemployment

Question 1

what are the two possible impacts of high unemployment on households

Answer 1

• loss of income
• loss of job

Question 2

explain the impact of loss of income on households

Answer 2

• can afford fewer goods and services or have to purchase inferior goods (lower quality)
• living standards decline

Question 3

explain the impact of loss of job on households

Answer 3

• poor mental health/self-esteem
• long-term unemployment

Question 4

what are the three possible impacts of high unemployment on firms

Answer 4

• larger pool of workers
• lower household incomes
• deskilling of workforce (structural/long-term)

Question 5

explain the impact of larger pool of workers on firms

Answer 5

• easier to recruit
• can afford lower wages, reducing costs

Question 6

explain the impact of lower household incomes on firms

Answer 6

• lower consumption
• lower revenue and profit

Question 7

explain the impact of deskilling of workforce on firms

Answer 7

• higher training costs (opportunity cost or lower profits)

Question 8

what are the two possible impacts of high unemployment on government

Answer 8

• more government spending on welfare e.g JSA
• lower tax revenue from direct and indirect taxation

Question 9

explain the impact of more government spending on welfare on the government

Answer 9

• worsens budget position
• opportunity cost - some public services may suffer

Question 10

explain the impact of lower tax revenue on the government

Answer 10

• worsens budget position
• higher government borrowing

Question 11

give three other economic effects of unemployment

Answer 11

• a waste of scarce labour resources (underutilisation/negative output gap)
• leads to lost output, slower growth (negative multiplier) and, potentially, a reduction in a country’s potential trend rate of growth
• high long-term unemployment can worsen income inequality

Question 12

give other effects of unemployment on workers

Answer 12

• loss of work experience (loss of human capital/gaps in CV)
• loss of current and future income (vulnerability to debt)
• changing patterns of jobs in the economy (occupational immobility)

Question 13

why may unemployment not always be a concern

Answer 13

• there may be lower inflationary pressure (DP and CP)
• workers can upskill

Question 14

explain lower inflationary pressure (demand-pull)

Answer 14

• fewer workers are in jobs
• less consumption of goods and services
• lower AD
• lower demand pull inflation

Question 15

explain lower inflationary pressure (cost-push)

Answer 15

• fewer workers are in jobs so firms’ wage costs are lower
• lower cost-push inflation

Question 16

explain workers can upskill

Answer 16

• periods of unemployment give workers a chance to develop new skills or consider a career change
• in the short-term it benefits the individual
• in the long-term it leads to a better qualified workforce (improve quality of labour and shift LRAS outwards)

Question 17

what does the impact of unemployment depend on

Answer 17

• the level/rate of unemployment
• how generous government welfare payments are (could maintain living standards)
• how long an individual is unemployed for
• the cause/type of unemployment
• the regional distribution of unemployment