Economic Theory: Advantages and Disadvantages of Unemployment

To the individual worker, unemployment is a tragedy; one that the government should do something about. To the economist, who is looking at the big picture, unemployment is a necessity, and a certain amount of unemployment is necessary to maintain a healthy economy.

The disadvantages of unemployment are obvious to most people, even if they have not studied economic theory. Without a job and a source of income, workers and consumers have less money to spend on goods and services; they also have less money to pay taxes, and often must receive government benefits (food stamps, etc.) to make ends meet.

Economic theory, as well as historical record, tells us that unemployment is not just a tragedy for the single unemployed worker and their dependents; it is an economic problem that affects the whole. This is especially true when lots of workers do not have jobs. A high unemployment rate will slow the entire economy down.

A high unemployment rate is not just a problem for the unemployed; it is also a problem for those who are still working. The burden of providing the money for government services, in the form of taxes, falls increasingly upon those still employed when large numbers of people are not working.

Yet unemployment, like most things that affect the economy, is not all bad when the whole economic system (macroeconomics) is studied. For instance, from the viewpoint of an employer, a high unemployment rate creates an advantage; it gives them a wide range of applicants for any job opening that they have available, and it also helps decrease the amount of wages that an employer has to pay their employees. In economic lingo, high unemployment creates a labor surplus.

Conversely a low unemployment rate results is less choices when selecting workers and being forced to increase wages; this in turn will affect the whole economy by driving up prices on goods and services.

It is for these reasons that economists sometimes debate what the ideal unemployment rate should be for an economy. Both high and low unemployment rates create problems for the economy; much like Goldilocks, we are looking for the amount that is "just right".

There will always be unemployment. For instance, frictional unemployment, which is caused by workers voluntarily becoming unemployed so that they can look for another job, will always exist. The same holds true for most of the other forms of unemployment: seasonal, structural, and cyclical unemployment; these forms of unemployment exist for good reasons and tend to self-correct over time.

In fact, the only type of unemployment that economists worry about a lot is induced unemployment, caused by outside sources: minimum wage laws, labor unions, government meddling. The other forms of unemployment over time will correct themselves; induced unemployment won't, leading employers to not hire people because they can not afford more employees or they can hire other people for less.

In fact, economists consider unemployment, in reasonable "magic number" amounts, to actually be beneficial to the long term health of the economy. This is due to three advantages that unemployment creates.

The first advantage that unemployment creates for the economy is that it forces the unemployed worker and the labor force to re-allot resources. Often without major shakeups, humanity keeps allotting resources, including our labor pool, in the exact same manner as we did in the past, even if there are better areas to employ people in. Unemployment forces people to examine how they are spending money and time; it allows an economy to distribute workers to different parts of the work force.

Dying industries and companies lay off workers, who end up becoming employed in economic sectors that are growing. Unemployed workers end up examining their spending habits, and may quit paying for goods and services that they are no longer using (ex. health club memberships and magazine subscriptions).

Unemployment also causes people to return to school. This tendency helps the economy in the long run by increasing the value of the worker. This is considered an advantage by economists.

And most importantly, unemployment increases self-employment. Often the unemployed decide to create their own jobs, to start working for themselves. This in turn often leads to new companies and businesses forming that would not exist if the owner and creator of the business would have remained working for someone else. Increasing self-employment is an economic advantage if it leads to new jobs being created.

Therefore, unemployment, at least in the eyes of economic theory, is a necessary evil, even if we do not like its short-term effects.