Economic and Social consequences of Unemployment

In Elkhart, Indiana, the rate of unemployment between 2008 and 2009 was between 15%-18%. Elkhart is known as the capital of the RV industry, an industry which crashed during the recession, leaving the majority of the population unemployed. A city with a population of only 53,000 people became the city with the highest rate of unemployment in USA.  This sudden crash in industry caused people to reduce their spending, consumption, which led to decreased overall growth hence reducing aggregate demand. Further, this caused the local factories to reduce supply and lay workers thus creating a vicious cycle of people being made redundant and an overall decrease in demand for goods and services. Naturally, this prevented entrepreneur from other cities from investing in Elkhart, as people did not have the money to buy the goods and services that investor may have to offer. In addition to these problems, families also suffered debt, housing stress, family stress etc. All these problems seemed to increase as the duration of unemployment increased. It also caused the number of divorces to increase which reflects few of the many social costs associated with unemployment.

Aggregate demand is made up of consumer expenditure, investment, government spending, and net exports. So, when consumer spending falls, this causes the aggregate demand to fall.
Its effects can be easily seen in the graph below.
The graph shows that when the consumption and spending fall, the aggregate demand falls, the supply then needs to be reduced in order to meet the market's requirement. This procedure requires firms to cut down their cost of production by firing workers. The graph also shows that this reduction in demand and supply causes the real GDP to fall.

Another factor that also contributes in unemployment is technology. As the technology advances, as the market sectors transform and demand for certain goods and services alter, this leads to short-term unemployment.

Unemployment is closely related with inflation. There is a historic relation which suggests that they are inversely proportional to each other. This is best explained by the Phillip's Curve which is a graphical representation of the inverse relationship between inflation and unemployment.

As one can see from the graph above, when unemployment raises, inflation falls and vice versa. Inflation also becomes the part of the cycle which cause the demand to fall and unemployment to rise. It was witnessed during the recent recession, in 2008, in America, when unemployment rose to about 6.1% from 4.7%; the inflation fell to 0.1% from 4.1%.

Also, it is worth noticing that if unemployment strikes certain sections of a country, it can lead to social costs and benefits to th other parts  of the country. For instance, if there is an increasing unemployment in north-west part of the UK, then the majority of working population will migrate to midlands, east and south of the UK in search for jobs. This will put pressure on the economy of those areas as there will be more population than before and a higher competition in those places to find jobs. Due to population overload and more and more people migrating, there is a threat of an increase in criminal activities and illegal practices. Although one might argue that in the long term, more competetive and efficient workers will be hired, thus contributing more to their jobs.

In 1980, Tees street was hit hard by the recession. Before the recession, there were 14,000 available jobs, now only 1300. Fall in aggregate demand caused every household on the street to be unemployed. This made a total of 38 unemployed people on one street. A family had been unemployed for 7 years and they had 5 children. So, in order to make some money, they were selling everything they could. Even if one wanted to move to a different area to work, it was not possible as there was no accommodation available. Another problem of prolonged unemployment is hysteresis. Hysteresis occurs when the unemployed remains out of work for a long period to lose the skills and the motivation which are necessary for regaining employment. It also causes them to lose hope. Government, however, did give out benefits of £40 a week, but these benefits stopped after 9 months. Nobody over 20 on that street had a job, so they began doing aimless activities. The longer this unemployment continued, the less they believed in their own government to support them. Students dropped out of school as they didn’t see any point in studying as there would be no future to put the skills to use. This shows that there is a waste of resources during unemployment.

Furthermore, since, less people are working; this reduces the output of the country. The government then has to cut public benefits in order to help the economy recover from a recession. On the other hand, having 0% unemployment is also bad for the economy as it cannot work at the full capacity for a long time period. This is because there aren’t enough resources available in the market to meet the demand/ supply. For instance, an increase in demand will put a contstraint in providing equivalent supply due to lack of resources in the economy as there is full employment and everyone is working to their maximum output. This forces firms to increase their prices in order to control the demand. Continuing increase in prices may cause inflation and higher interest rates. Increased interest rates would lead to a fall in investments and therefore the requirement of labor will fall and people will have to be laid off. Basically, situation will arrive sooner or later which will force a section of population to go unemployed as it is difficult to sustain zero unemplyment in an economy. Therefore, having little unemployment is not bad for the economy, but having a high rate on unemployment is very damaging to the economy. It is believed that a country can keep a low rate of unemployment by keeping a high inflation rate (relationship suggested by Phillips curve). This low rate of unemployment is known as natural unemployment. A country needs to have a low unemployment rate as an economy cannot work at full capacity as it won’t be able to allocate resources in the most efficient manner and the resources are not available at full capacity at all times.

In conclusion, the costs of unemployment on the economy and the society as a whole pose a huge problem for governments. Social costs such as increase in criminal activities, depression, suicide, criminal activities lead to other economic costs such as fall in consumption levels and the economic growth of the country slows down. Also, large- scale migration in certain areas of a country might pose a threat to its inhabitants, though it might prove to be beneficial for firms in the long-run as they will be able to hire more efficient and competetive workers. However, there can't be zero unemployment in any economy because once an economy reaches full capacity, workers will have to be laid off due to several reasons, such as poor resource allocation, jeopardizing of demand and supply cycle, etc. Therefore it is essential to have a small amount of unemployment in an economy, though higher rates of unemployment will prove to be a threat to society and economy.