Causes and effects of unemployment essay


Causesand effects of unemployment

Causesand effects of unemployment

Unemploymentis both an economic and a social problem. This is due to the impactof unemployment on the economy as well as individuals and families.Unemployment is a situation where individuals who are activelyseeking employment are without work. The unemployment rate is a ratioof the number of people employed in the labor force and the number ofunemployed individuals. There are several types of unemployment(Abel, 2012). Unemployment is caused by several factors. The rate ofeconomic growth is the most important factor that has an impact onunemployment rates. Other causes of unemployment include social andindividual factors such as the level of education. Although economicimpacts on the economy are more important to economists, the impactson individuals and families have been ignored. Economists are moreconcern about the implications of increased rates of unemployment onthe labor market, demand for consumer goods, productivity and thegross domestic product. However, the social impacts such as loss ofincome for the families resulting in poverty, homelessness and familybreakdown are critical impacts of unemployment. This paper looks atthe most important causes of unemployment. It also looks at economiceffects of unemployment and its impacts on individuals and families.The paper begins by discussing two major causes of unemployment. Itthen outlines some of the effects of unemployment on the economy andindividuals or families. The conclusion highlights the main argumentsin the paper.

Causesof unemployment

Accordingto Arthur Okun, an American economist, the rate of unemployment inthe United States economy is inversely proportional to economicgrowth. Economist concurs with the fact that economic growth rate isthe most important factor that causes of unemployment. A decline ineconomic growth is associated with a rise in unemployment rates inthe population. On the other hand, a decline in unemployment rates isan indicator of economic growth. Okun’s law argues that there is astatistical relationship between changes in the economic output andthe rate of unemployment (Ball et al, 2013). Although the law is notbased on an economic theory, the changes in unemployment are afunction of the gross domestic product in the economy. Therefore,the relationship between economic development and economic growth isintertwined. This means that economic growth affects unemploymentrates while unemployment rate indicates economic growth. Economicgrowth is associated with increased output. The increased outputrequires more people to be involved in economic activities, whichreduce unemployment. A decline in economic growth is characterizedby a decline in the level of output. When the output in the economyis low, fewer people are involved in economic activities resulting inunemployment (Ball et al, 2013).

Thelevel of education has a significant impact on employment prospectsin the population. Individuals with a higher level of education areless likely to be unemployment. Studies in the United States andother parts of the world, mainly in OECD countries, indicate thatcities and communities with higher rates of joblessness haverelatively lower educational achievements. Consequently, it has beensuggested that reducing the educational level gap can have a directimpact on the level of unemployment (OECD, 2012). People with lowereducational level have limited job prospects, mainly in the unskilledsector. These jobs are more affected by other economic factors suchas economic slowdown which have direct impacts on unemployment rates.On the other hand, more educated individuals have more job prospectsand are more competitive in the labor market. At the household level,lower education level has a huge implication on unemployment (OECD,2012).


Therate of unemployment has huge impacts on the economy. While economicslowdown is a major cause of unemployment, high rates of unemploymentcan have negative impacts on economic development. Unemploymentincreases the burden of the government due to increased unemploymentbenefits, provision of food and health care costs through Medicaid.Unemployment results in the diversion of funds that could have beenused for infrastructure development. Income tax is a major source offinances for the government. Consequently, unemployment results intoreduced government revenue (Carlberg, 2012).

Unemploymenthas a direct impact on the spending power of the population. Loss ofemployment causes a reduction in consumer buying power in the economydue to loss of disposable income. This has adverse effects on theeconomy. Personal consumption provides the most important market forthe economy output. Reduced disposable income in the economy resultsin a decline in demand for consumer goods. This discouragesproduction and thus a reduction in gross domestic product.Additionally, unemployment is associated with other socioeconomicproblems that have negative impacts on the economy. For example,unemployment increased insecurity and crime rates (Carlberg, 2012).

Effectson individuals and families

Themost important direct impact of unemployment on individuals andfamilies is the lack of income. Employment is the main source ofincome for many families and individuals. Unemployed individual is adependent since he or she has to depend on other family members forfinancial support. The situation is worse if the breadwinner in thefamily is unemployed. Such individuals and families are unable to payfor basic goods and services such as food, shelter, health care andclothing. This is mainly due to lack of disposable income (Mankiw,2014). Extended periods of unemployment usually results in poverty,hunger and homelessness. Due to the increased cost of education inthe modern society, unemployment reduces academic achievement.Children in families suffering from extended unemployment areunlikely to attain higher levels of education (Marshalle, 2014).Consequently, these children will have limited access to availableemployment opportunities in the future. This will create an unendingcycle of poverty in the family.

Thefinancial and emotional effects of unemployment have a huge impact onthe stability of families. Unemployment means that an individual hasno income to support a family. It also affects the state of mind ofthe individual, especially if other members of the family depend onhim or her. For example, if the breadwinner in the family loses hisor her job, the family will no longer be able to enjoy some of thethings they enjoyed before. The lifestyle in the family will changedrastically, which may negatively affect the stability of the family.This may include changes in lifestyles, eating habits and relocationto other neighborhood, towns or countries. Incidences of familybreakups and domestic problems are more common when the rate ofunemployment is higher (Marshalle, 2014).


Unemploymentoccurs when individuals who are actively seeking employment areunable to get jobs. There are many causes of unemployment in theeconomy. The most important economic factor that increases the rateof unemployment is a decline in the economy. Individual factors suchas the level of education can also contribute to unemployment. Unemployment has far-reaching social and economic implications. Itincreases government spending and reduces the spending power of thepopulation, which negatively affects the economy. Families andindividuals are also negatively affected by unemployment. Loss orlack of employment is associated with lack of income, which resultsin a wide range of problems such as changes in lifestyles, lack ofbasic goods and services, homelessness, family breakdowns andpsychological problems.


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Ball,L., Daniel, L. &amp Prakash, L. (2013). Okun’sLaw: Fit at 50? IMF Working Paper 13/10.

Carlberg,M. (2012). Unemploymentand inflation in economic crises.New York: Springer.

Mankiw,N. (2014). Principlesof microeconomics.Australia: South-Western.

Marshalle,M. (2014). Economicsof unemployment.New York, NY: Nova Science Publ.

OECD(2012), “How does education affect employment rates?” inEducationat a Glance 2012: Highlights,OECD Publishing.