Why is Unemployment Bad for the Economy?

by | Feb 23, 2023

When people are employed they are working and creating value in the economy which benefits everybody. Although there will always be a certain proportion of the population without employment, if unemployment is too high it can be detrimental to the economy. The following are some ways in which unemployment can be undesirable at the individual level as well as at a societal level. 

Unemployment affects the individual 

Being unemployed has considerable negative effects on the individual. For most people, losing a job will result in an immediate diminishment of their quality of life if they are not prepared for the unexpected. Even with unemployment insurance benefits and other types of governmental assistance most people will have to adjust their lifestyle. 

If a person remains unemployed for an extended period of time there could be longer-term negative effects. A person’s job skills may deteriorate if they do not work for a prolonged period of time. This can make them less able to earn money in the future. Of course, this can noticeably diminish a person’s quality of life. 

Unemployment and society 

Beyond just the individual level, unemployment can have negative effects on overall society. When there are high unemployment levels that are prolonged it can commonly prompt the government to enact protectionist policies due to political and fiscal pressure. For example, there may be political pressure for lawmakers to implement severe immigration restrictions. 

Protectionism can lead to back-and-forth retaliatory tariffs and other types of trade restrictions between countries. This ultimately hurts the economic growth of all countries involved in a trade war. 

Unemployment hurts the country 

When a large number of people are unemployed in a country the national government is hurt because there is less tax revenue coming in which the government needs to provide social services and ensure national security. It can also mean larger payments from federal and state governments for unemployment insurance benefits, Medicaid, and food assistance. All of these factors resulting from unemployment makes it more challenging for the government to allocate resources in an efficient and productive manner. 

Unemployment and the economy 

Prolonged and high unemployment means that consumers will have less money to spend on goods and services. This hurts businesses by decreasing their revenue, cash flow and profits. People will also end up with more debt which ultimately is not paid back which hurts lenders who may be less willing to lend, therefore dampening growth in all types of industries. 

How does unemployment hurt investors? 

Unemployment can impact your investment portfolio. With economic growth weakened due to prolonged unemployment most stocks will be hurt since companies will be making less revenue and profits. Other types of assets such as real estate and commodities may be hurt due to lower consumer demand. Therefore, it is important that investors have a strong understanding of how to configure their portfolios to mitigate this type of economic backdrop.