Explain why governments might view high unemployment as a serious concern.
Many recent university graduates in China are struggling to find employment, even though industries such as electric vehicle production and scientific research are in need of skilled workers. Youth unemployment has been made worse by the prolonged lockdowns during the COVID-19 pandemic.
a. Explain why governments might view high unemployment as a serious concern. [10]
Introduction
Unemployment is a major macroeconomic issue that governments around the world, including China, monitor closely. It refers to a situation where individuals who are willing and able to work at prevailing wage rates cannot find employment. When unemployment is high, it represents a failure to make full use of a country’s labour resources, leading to both economic inefficiency and social costs. Governments regard high unemployment as a serious concern because it affects overall economic output, worsens the fiscal position, and can trigger longer-term structural issues.
Underutilisation of resources
From a macroeconomic standpoint, high unemployment reflects an underutilisation of labour, which is one of the key factors of production. Economics is fundamentally concerned with scarcity—the idea that resources are limited while human wants are infinite. Labour, as a scarce and valuable resource, should ideally be employed to produce goods and services that improve societal welfare.
When a substantial portion of the labour force is unemployed, the economy fails to operate on its Production Possibility Curve (PPC). Instead, it operates within the curve, indicating that the economy is producing less than its full potential. This inefficiency means that fewer goods and services are available to meet the population’s needs, which can result in lower living standards.
In the case of China, even as sectors such as electric vehicles and scientific research report worker shortages, many recent graduates remain jobless. This mismatch suggests that labour market inefficiencies or rigidities—such as skills mismatches or poor labour mobility—are contributing to underemployment. The longer these individuals remain outside the workforce, the more their skills may depreciate, compounding the problem and worsening the waste of human capital.
High fiscal costs, affecting budget position
Beyond resource inefficiency, high unemployment imposes a significant fiscal burden on governments. The budget position—calculated as government revenue minus expenditure—can deteriorate sharply when unemployment is widespread.
On the expenditure side, governments often provide unemployment benefits, welfare payments, or social assistance to help individuals meet their basic needs while they search for new work. These transfer payments are non-productive in the sense that they do not directly increase economic output but are essential for maintaining social cohesion and preventing poverty. As the number of unemployed people rises, these outlays increase significantly, putting upward pressure on government spending.
At the same time, government revenues decline. Unemployed individuals do not earn wages and therefore do not pay income tax, a major revenue source. Moreover, with lower disposable income, consumer spending falls, reducing indirect tax revenues such as value-added tax (VAT) or sales taxes. This twin effect—rising spending and falling revenue—leads to larger budget deficits.
If the fiscal deficit persists, the government may be forced to borrow more by issuing bonds, which increases the national debt. Servicing this debt comes at a cost—interest payments consume budgetary resources that could otherwise be allocated to infrastructure, education, or healthcare. In the long term, this crowding-out of productive expenditure may hinder the government’s ability to invest in economic growth and development, creating fiscal rigidity and reducing future policy space.
Furthermore, high public debt levels can affect a country’s credit rating, increase borrowing costs, and dampen investor confidence, especially in open economies exposed to capital flows.
Conclusion
In conclusion, governments view high unemployment as a serious concern because it signals both economic underperformance and creates fiscal strain. Unemployment leads to inefficient use of labour, causing the economy to produce below its capacity, which affects growth and living standards. Simultaneously, it worsens the budget balance, increasing government spending while reducing tax revenues, and can contribute to rising national debt. These outcomes not only weaken short-term macroeconomic stability but also pose long-term threats to a country’s economic resilience and global competitiveness. Hence, tackling unemployment—especially among youth—is a critical policy priority for any government seeking sustained economic progress.
Note to students: Discussion of other negative implications of high unemployment may be possible (e.g. reduced consumer spending)
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