Explain two economic reasons why governments are concerned with high unemployment.
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Large numbers of fresh university graduates in China are currently without jobs, despite a shortage of skilled workers in emerging "hard tech" sectors, such as electric vehicles and scientific innovation.
Three years of lockdowns to curb the Covid-19 pandemic have aggravated youth unemployment. Yet, some youths are still holding out for jobs that match their aspirations.
(a) Explain two economic reasons why governments are concerned with high unemployment. [10]
Underutilisation of resources
The central problem of economics is scarcity, where resources such as land, labour, and capital are limited, but human wants are unlimited. Labour is a key resource that must be employed effectively to maximise output. When unemployment is high, it indicates that a portion of the labour force is not being used productively, leading to inefficiency in the economy.
Unemployment results in an economy operating within its Production Possibility Curve (PPC), rather than on the curve itself. The PPC represents the maximum output combinations an economy can produce given its available resources and technology. If some of the labour force remains idle due to unemployment, the economy is producing less than it could, indicating that resources are not being fully utilised. This inefficiency prevents the economy from reaching its full potential output, which translates to lower levels of goods and services being produced and consumed. Consequently, the standard of living in the country may stagnate or even decline as fewer resources are used to meet the population's needs.
High fiscal costs, affecting budget position
High unemployment also imposes significant fiscal costs on governments, worsening the budget position, which is calculated as government revenue minus government spending. When unemployment rises, several budgetary pressures emerge:
In many countries, including China, the government provides financial support to the unemployed in the form of unemployment benefits or other forms of social assistance. As more individuals become unemployed, government spending on these transfer payments increases, placing a strain on public finances. These payments are non-productive in the sense that they do not contribute directly to economic output, but are necessary to support the unemployed population.
Unemployed individuals do not earn an income, and as a result, they do not contribute to personal income taxes, which are a significant source of government revenue. In addition, lower consumption due to reduced income levels means less indirect tax revenue from sales taxes or value-added taxes (VAT). This reduction in tax revenues further worsens the government’s budget position.
The combination of higher government outlays for unemployment benefits and lower tax revenue collection leads to a deterioration in the budget balance. If the budget deficit becomes severe, the government may need to borrow to finance its expenditures, increasing national debt. This debt carries interest payments, which represent an opportunity cost because the funds used to service the debt could have been invested in productive areas such as infrastructure, education, or healthcare. Over time, high levels of debt can constrain a government’s ability to invest in long-term growth strategies, potentially hindering the country’s economic progress.
Note to students: Discussion of other negative implications of high unemployment may be possible (e.g. reduced consumer spending)