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Costs of Unemployment


Unemployment is one of the significant issues for any economy and country. With its presence, it becomes almost impossible for an economy to successfully grow and prosper. Unemployment not only affects the overall national economy and the level of economic activities in a country, but it also has several damaging social effects. All these damages are also commonly known as ‘costs of unemployment’.

These costs of unemployment can be social, fiscal and economical. In order to study them all, we divide costs of unemployment into following sub-categories.

1. Costs of Unemployment to the Unemployed:

Unemployment, apart from damaging the overall economy of a country, brings severe negative effects to the unemployed person. Human capital is an important aspect for any economy, which is why it becomes all the more important to know the possible damages to the unemployed person.

Following are the costs of unemployment to the unemployed:

  • The unemployed suffers a lot of status.
  • The unemployed are more likely to experience divorce, nervous breakdowns, bad health, and are more likely to attempt suicide than the rest of the adult population.
  • The longer time a person has been out of work, the harder they are likely to find a job as their skills have become rusty.

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2. Costs of Unemployment to the Economy:

The other most obvious cost of unemployment is suffered by the economy itself. If there is an unreasonably high level of unemployment, the economy suffers on various fronts. Following are the two most negative outcomes or costs of unemployment to the economy:

i. Lost Output of Goods and Services:

An economy with high unemployment produces within its production possibility frontier. Unemployment causes a waste of scarce economic resources and this wastage can never be recovered again.

ii. Fall in Human Capital:

Workers, who are unemployed for a long period of time, become deskilled. This reduces their chances of getting employment in the future, which increases the burden on government and the economy of the country. Moreover, unemployment also wastes some of the resources used in for the training of the worker.

3. Fiscal Cost to the Government:

For an economy that does not fully employ its labor force, it is obvious to suffer many fiscal losses as well. Following are the fiscal costs to the government that is caused by high unemployment.

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  • When individuals are unemployed, they receive unemployment benefits. Moreover, they also do not pay any income tax. This results in a negative overall balance.
  • As unemployed people spend less, they also contribute less to the government in the indirect taxes. This, in turn, becomes a serious fiscal cost to the government.
  • The rise in the government spending along with the fall in tax revenues may result in a higher government borrowing, which is seriously detrimental for any economy.


4. Social Costs of Unemployment:

As mentioned earlier, high unemployment does not only bring fiscal and economical damages, but it also has several negative effects on the social aspect of a country. As unemployment increases, crimes also increase. This increment in criminal activities affects all the people living in the economy. Moreover, an increase in divorces, worsening health and lower life expectancy are also observed due to unemployment. These are only some of the social costs to be mentioned.


Unemployment is always one of the biggest worries for any economy. Because of a high unemployment rate, the economy suffers on more than one front. Although the true estimate of the damage can never be predicted, the above-mentioned points are some of the biggest costs of unemployment.

Learn about all the different types of unemployment. These types include Cyclical Unemployment, Frictional Unemployment and Structure Unemployment.

High unemployment rate can be very dangerous for the economy. However, there are certain policies to reduce unemployment, which can be effective in case of high unemployment. Learn about all those policies to reduce unemployment here.


Sanctuary on January 23, 2014:

A long term avoidance of the issue of unemployment is under employment and low wages. The number of people on assistance programs that are employed is just as large as those out of work. Corporations that pay the lowest wages are also the largest makers of social programs. Capitalism requires money to be made in order to purchase goods. Raising the minimum wage is actually the best stimulus in a terrible economy. More wealth at the top actually defeats growth at the bottom. How many people who work at a fast food restaurant can actually afford to eat at one for example. If they accept food stamps I suppose. Getting above the assistance programs, often means eating less food. This is not a failure of the Social programs but is a failure to pay a wage above the cost of living. Going green is all about sustainment but we are to greedy to even create sustainment for ordinary people. You do not create anything but poverty when you cut assistance programs. The solution is creating real wages and more jobs. Until then we have to keep desperate people alive orb they will find their own way. I hate the debate on socialism because its not politically driven. All the socialism created in America is created by the failure of capitalism and it economic policies. Exploring the debate, only tells us how far all our current leaders are in creating a profitable society for all people. With that said there will always be poverty for those who choose to be but most of us are here by no choice. The number of people doing all the right things and still living in poverty denotes in equality in terms of labor.

Mike Robbers from London on January 15, 2013:

Europe's biggest enemy as we speak is unemployment! The figures in countries such as Spain or Greece are simply beyond any imagination [more than 25%!!]. Let's all hope our leaders will tackle the issue adequately. Long unemployment can severely hurt the individual, psychologically as well...

JanMaklak from Canada on January 15, 2013:

Am I wrong? I've been saying for 30+ years that China and other Pacific Rim nations are eating away at jobs in the western hemisphere. The dream of financial independence is being taken away from us a little more every day. Our governments, not China or other nations are to blame. Our systems promote a short term solution and a quick fix. The North American economy is now fundamentally broken and until the western governments wake up and decide to make the "big fix" the economic cycles will continue to slip further away from prosperity.

The saying I invented: "The third world war was already fought. China won it and we didn't even realize we were in an economic fight for our life"

cre8ivOne from Midwest, USA on January 15, 2013:

This topic is looming in our country and it's scary really some cannot find any work. It seems to be an employers market where overly qualified people are taking jobs that a few years ago were of a lower pay scale but because of the tough situation, it seems to be trending. Great article !

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