Economics Online Tutor
| The Costs of Unemployment |
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| UNEMPLOYMENT (MAIN PAGE) UNEMPLOYMENT STATISTICS THE EFFECT OF MINIMUM WAGE LAWS ON UNEMPLOYMENT THE RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT |
Unemployment has many negative
consequences for society. Some of
the important ones are listed on this
page:
GDP output gap; distribution effect;
and social costs.
consequences for society. Some of
the important ones are listed on this
page:
GDP output gap; distribution effect;
and social costs.
GDP OUTPUT GAP:
When unemployment increases, the nation's total output falls below potential
output, reducing the standard of living. Potential GDP is the level of GDP
when unemployment is at the natural rate of unemployment. When
unemployment is higher than the natural rate, it creates a shortfall of GDP
below potential GDP. This shortfall is called the output gap.
The natural rate of unemployment is called the non-accelerating inflation rate
of unemployment (NAIRU). This is the lowest unemployment rate consistent
with not putting upward pressure on prices and wages.
You may be accustomed to the term "full employment" instead of "natural rate
of unemployment". Your class or textbook may even use that term. Many
economists are moving away from using the term "full employment" because
it has caused confusion. Full employment does not mean zero
unemployment. Frictional, structural, and seasonal unemployment always
exist in a dynamic economy. "Natural rate of unemployment" implies a
realistic level of output.
Measuring the natural rate of unemployment is difficult. It changes over time,
and the GDP gap at any given time is difficult to measure. It is different in
different countries with different policies and labor markets. Economists
tend to agree that in the United States, the natural rate of unemployment
varies over time between 4% and 7%.
Business investment falls during times of high unemployment, which could
cause the future level of output to decrease as well.
How large is the GDP output gap for a given level of unemployment? One
rule of thumb to measure the output gap is called Okun's Law. Okun's Law
states that for every 1% that the unemployment rate increases above the
natural rate of unemployment, the output gap increases by 2.5%. Okun's Law
is quantified using this formula:
((potential GDP minus actual GDP) divided by actual GDP) x 100 =
(actual unemployment rate minus the natural unemployment rate).
When unemployment increases, the nation's total output falls below potential
output, reducing the standard of living. Potential GDP is the level of GDP
when unemployment is at the natural rate of unemployment. When
unemployment is higher than the natural rate, it creates a shortfall of GDP
below potential GDP. This shortfall is called the output gap.
The natural rate of unemployment is called the non-accelerating inflation rate
of unemployment (NAIRU). This is the lowest unemployment rate consistent
with not putting upward pressure on prices and wages.
You may be accustomed to the term "full employment" instead of "natural rate
of unemployment". Your class or textbook may even use that term. Many
economists are moving away from using the term "full employment" because
it has caused confusion. Full employment does not mean zero
unemployment. Frictional, structural, and seasonal unemployment always
exist in a dynamic economy. "Natural rate of unemployment" implies a
realistic level of output.
Measuring the natural rate of unemployment is difficult. It changes over time,
and the GDP gap at any given time is difficult to measure. It is different in
different countries with different policies and labor markets. Economists
tend to agree that in the United States, the natural rate of unemployment
varies over time between 4% and 7%.
Business investment falls during times of high unemployment, which could
cause the future level of output to decrease as well.
How large is the GDP output gap for a given level of unemployment? One
rule of thumb to measure the output gap is called Okun's Law. Okun's Law
states that for every 1% that the unemployment rate increases above the
natural rate of unemployment, the output gap increases by 2.5%. Okun's Law
is quantified using this formula:
((potential GDP minus actual GDP) divided by actual GDP) x 100 =
(actual unemployment rate minus the natural unemployment rate).
DISTRIBUTION EFFECT
High rates of unemployment do not affect everybody equally. Its
negative impact is felt mostly by the unemployed persons themselves,
and their families. These are the persons who suffer from a loss of
income, a lower standard of living, and a loss of social status.
Moreover, high unemployment tends to impact disadvantaged
demographic groups more than others. Young workers, unskilled
workers, and minority groups tend to have higher rates of unemployment
than other groups.
Unemployment tends to redistribute wealth from the lower classes
to the upper classes.
High rates of unemployment do not affect everybody equally. Its
negative impact is felt mostly by the unemployed persons themselves,
and their families. These are the persons who suffer from a loss of
income, a lower standard of living, and a loss of social status.
Moreover, high unemployment tends to impact disadvantaged
demographic groups more than others. Young workers, unskilled
workers, and minority groups tend to have higher rates of unemployment
than other groups.
Unemployment tends to redistribute wealth from the lower classes
to the upper classes.
SOCIAL COSTS
High unemployment is associated with such social costs as high crime
rates and alcoholism. Infrastructure and public services suffer due to
lower tax revenues. Lower investments in education, combined with
the negative effect of unemployment on the motivation of young
people, can impact all of the costs associated with unemployment for
future generations.
High unemployment is associated with such social costs as high crime
rates and alcoholism. Infrastructure and public services suffer due to
lower tax revenues. Lower investments in education, combined with
the negative effect of unemployment on the motivation of young
people, can impact all of the costs associated with unemployment for
future generations.
| UNEMPLOYMENT (MAIN PAGE) UNEMPLOYMENT STATISTICS THE EFFECT OF MINIMUM WAGE LAWS ON UNEMPLOYMENT THE RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT |
| This page, along with additional commentary, was posted on the "Economics Online Tutor" Facebook page's timeline on August 25, 2012. |