Assess the view that falling unemployment will inevitably lead to an improvement in the standard of living for people in the UK. (25)

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Assess the view that falling unemployment will inevitably lead to an improvement in the standard of living for people in the UK. (25)

Unemployment is a situation where people who are able, available and willing to work are unable to find employment. The standard of living of the general population in the UK relates to the quality of the life they are able to lead. Falling unemployment has consequences on inflation, wages, government finances and the social fabric of society.

Falling unemployment generally leads to higher wages, which results in a greater standard of living for economic agents as they have greater income. The derived demand for labour increases as firms must hire more workers to meet greater demand. This results in firms having to offer higher wages to workers as there is a smaller pool of workers to choose from, and so the firm must be attractive to workers by offering higher wages. These higher wages can translate into an improvement in the standard of living for people in the United Kingdom as they can now spend more money, to improve their quality of life. This positive impact is exacerbated through the positive multiplier effect. The initial increase in aggregate demand will lead to a proportionately greater increase in national income, which will help other firms as they can benefit from other firms hiring, as they now have more consumers. However, such an improvement could possibly be offset by inflation. As firms are forced to offer higher wages to workers in order to employ them, their costs of production increase. This could lead to firms passing on the higher costs to consumers in the form of higher prices- inflation. This is shown by the increase in price level form Pl 1 to Pl 3. This inflationary pressure caused by falling unemployment could actually lead to a deterioration in the quality of life of people in the UK as they may not be able to afford goods and services due to inflation. Also, inflation will erode the real value of savings held by many people in the UK.

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Falling unemployment can help restore the health of the UK government’s finances. As workers return to the workforce, the government no longer has to pay those economic agents through welfare programs, such as Universal Credit or Job Seekers Allowance. This helps reduce government expenditure. Also, now these workers will be earning an income, which enables the UK government to gain tax revenue from them in the form of income tax, and national insurance contributions. A combination of lower expenditure and higher revenue enable the government to either achieve a lower budget deficit or perhaps even run a budget surplus. ...

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