The Importance of Low Unemployment

There are several reasons why high unemployment is harmful.

1. If you are unemployed, it is difficult to earn enough income to buy the things you need and want. If you do not have a job (and you want one), then obviously you care about unemployment. Everyone in society should care whether you are unemployed, however. Government programs that provide financial assistance to people in need are funded by taxpayers. When unemployment increases, government expenditures on social programs also increase. This requires additional tax revenues, reductions in other government programs, or an increase in public debt. All of these options contain social costs. By keeping unemployment low, these social costs are reduced. This is also why it is important to begin saving for your retirement as soon as possible. If you save wisely and consistently from the start of your working career, then you may not need to work to have enough income to buy the things you need and want in your old age.

2. High unemployment over an extended period of time will cause a country to have a lower standard of living than it would have with low unemployment. High unemployment is an inefficient use of economic resources. This means the economy is not producing as much output as is possible with the current level of resources and technology. Thus, the country’s gross domestic product (GDP) and related measures of output and income are lower than they could be if unemployment were lower. Unemployment can be illustrated on a production possibilities frontier. As unemployment increases, the production point for the economy moves further from the PPF.



To illustrate the potential effect of unemployment on a country’s standard of living, consider the following example. Imagine an economy where every worker is capable of producing $40,000 worth of output each year. Suppose there are 150 million workers in the labor force and 10% of them are unemployed.[1] This means there are 15 million workers who would like a job, but cannot find one. These unemployed workers are capable of producing $600 billion worth of goods & services. If the economy has a population of 225 million people, then adding $600 billion to the economy’s GDP would increase the standard of living by $2667 per person.

3. Unemployment is associated with other social problems. Drug and alcohol abuse and related crimes are much more prevalent in neighborhoods, cities, and countries with high rates of unemployment. This sentiment is echoed in the expression “Idle hands are the devil’s workshop.”[2] For example, the most likely time for teenagers to commit crimes is between the end of school and the time parents return home from work. The reduction of unemployment may help reduce other problems that plague society.