Unemployment is a significant economic issue with far-reaching consequences. It impacts not only the individuals who are unemployed but also the broader economy and society. The effect of unemployment most commonly present themselves in the forms of economic and social costs.

What are the Economic Costs of Unemployment?

Unemployment imposes various economic costs on individuals, businesses, and governments. These costs can be categorised into direct financial costs and indirect costs related to reduced economic activity and productivity.

Loss of Household Income

The most immediate economic cost of unemployment is the loss of income for individuals. This loss reduces their purchasing power, which can lead to decreased consumer spending. Since consumer spending $(C)$ is a significant component of aggregate demand $(AD=C+I+G+(X-M))$, reduced spending can also slow down economic growth. For example, during the COVID-19 pandemic, many individuals faced unemployment, resulting in a significant drop in consumer spending. In Australia, household consumption expenditure fell by 12.1% in the June quarter of 2020, contributing to the country's first recession in nearly three decades.

Loss of Output and GDP

Unemployment represents a waste of productive resources. When workers are unemployed, the economy operates below its production possibilities frontier, leading to a loss in potential output. For example, using Okun's Law, which suggests that for every 1% increase in unemployment, a country's GDP will be roughly 2% lower than its potential GDP, we can consider the Australian economy during the Covid pandemic.

The difference of 2% (6.5% - 4.5%) in unemployment could translate to a GDP loss of approximately:

$$2\%\times 2\times \$1983\: b =\$79.32 \:b$$

Increased Fiscal Costs

Unemployment increases government expenditure on welfare payments and reduces tax revenue. This has the potential to lead to the implementation of higher budget deficits. For example, in the 2020-21 fiscal year, the Australian government spent $33.3 billion on unemployment and related benefits, an increase from AUD 19.4 billion in the previous year, largely due to COVID-19 impacts. Additionally, during the Covid pandemic, $90 billion was allocated to Jobseeker and Jobkeeper programs, to support unemployed individuals. As a result, the Australian government faced a significant budget deficit during the COVID-19 pandemic, with the deficit reaching AUD 85.3 billion in the 2020-2021 financial year.

What are the Social Costs of Unemployment?

The social costs of unemployment extend beyond economic metrics, affecting individuals, families, and communities.

Mental Health Issues

Unemployment is strongly associated with increased rates of mental health problems, including depression, anxiety, and low self-esteem. For example, a study by the Australian National University found that unemployed Australians are 3 times more likely to experience depression compared to those with jobs.

Physical Health Deterioration

Job loss and unemployment are linked to poorer physical health outcomes, including increased risk of cardiovascular diseases and overall mortality. For example, research published in the Medical Journal of Australia showed that unemployment increases the risk of premature mortality by 63% for men and 65% for women.

Family Stress and Breakdown

Financial stress from unemployment can lead to increased family tensions, higher rates of domestic violence, and relationship breakdowns. For example, a report by the Australian Institute of Family Studies found that couples where one partner experienced job loss were 70% more likely to separate compared to couples with stable employment.

Crime and Social Unrest

High unemployment, especially among youth, is associated with increased crime rates and potential for social unrest. For example, the ABS reported that the number of offenders proceeded against by police across Australia decreased by 6% from 2021-22 to 2022-23. This runs parallel to the decrease in Australia's unemployment rate, from 7.4% in 2020 to 3.8% as of March 2024.

What are the Long-term Economic Implications of Unemployment?

The long-term effects of unemployment can have long-lasting impacts on the economy. These include: