·The Cost to the Exchequer
·The Economic Cost
The Social Cost of Unemployment
The social cost of involuntary unemployment is incalculable. For an individual, the demoralising effect that it can have clearly depends upon whether the period of unemployment is short term or long term. Short term unemployment may have no serious effect on an individual whilst long term unemployment can be devastating. According to the Labour Force Survey in 1998, over 26% of the people unemployed for more than a year were over 50 years of age. Many of these people believe that they are failing to find jobs because they are too old and a large number of older people have become reconciled to the prospect of never working again. A major problem, of course, is that as job searchers become more and more pessimistic about their chances of finding jobs become even more remote. According to survey carried out by the Manpower Services Commission, many of the longer-term unemployed become bored, idle, lose their friends and suffer from depression. One respondent to the survey stated, “It is not just money. Work gives you something to do. I’m just wasting away.” There is also evidence of increase family tensions leading in some cases to violence, divorce and family break ups. Unemployment can also lead to homelessness, as in some circumstances building societies may foreclose on mortgage if repayments are not kept up. One can only speculate on the effect of long term unemployment on vandalism, football hooliganism and the crime rate in general. In countries without adequate welfare provisions for the poor, unemployment may be very much more severe in its effects. It may lead to a considerable degree of social deprivation and a miserable existence for the families involved. In extreme cases (eg. Where unemployment means no income at all), it can lead to starvation. The cost of the Exchequer
The cost of both voluntary and involuntary unemployment to the Exchequer is more readily quantifiable than the social cost. Voluntary unemployment is a situation in which workers refuse to accept a cut in real wages, so that the prevailing real wage is above the market clearing level whilst Involuntary unemployment is a situation in which a worker is unable to find a job at the going wage rate. It consists of the following components: ·Benefits which have to be paid to the unemployment. These include unemployment benefits, supplementary benefit, housing benefit, government contributions to redundancy payments and payments to those men aged between 60_65 who no longer register as unemployed. ·The loss of tax revenue which would otherwise have been received. This consists mostly of the lost income tax, but also includes lost indirect taxes because of the reduction in spending. ·The loss of National insurance contributions which would other0wise have been received. The economic cost
The economic cost with respect to unemployment represents a waste of resources and means that the economy is producing a lower rate of output than it could do if there were full employment. Diagram showing a time-series of actual gross domestic product in the United Kingdom measured at 1975 prices since 1960.
The trend line drawn through the peaks of the time- series can be regarded as providing a rough estimate of the economy’s potential output during the period. Potential output is that rate of gross domestic product which would result if all resources were fully employed. The shaded area between the actual time- series and the trend line is called the output gap and it is a reflection of the output of goods and...