(a)What are the causes/consequences of unemployment?
The causes of Unemployment are either Demand Side or Supply Side. (most issues in Economics are due to demand and supply)

Demand side or (Demand deficient unemployment) cccurs in a recession or period of low growth. Because firms produce less they  need less workers. If the US goes into recession you can expect to see unemployment rise quite sharply.
Supply side unemployment can be due to:

  • Frictional Unemployment (people looking for work)
  • Structural unemployment (mismatch of skills, geographical immobilities e.t.c)
  • Real Wage Unemployment (wages above the equilibrium)
  • Inflexible Labour Markets.

More on Causes of unemployment here

Consequences of Unemployment

1. Rising Government Borrowing. If unemployment rises, less people will pay income tax therefore the government will receive less tax revenue. However, the government will need to spend more on unemployment benefits.

2. Negative Multiplier Effect. If people are made unemployed they will spend less, causing a further fall in consumer spending and Aggregate Demand AD. This could lead to lower growth and more unemployment. In other words the initial fall in output was magnified.

3. Inefficient Use of Resources. Unemployment means the economy is producing less than capacity.

4. Lower Inflation. One beneficial effect of unemployment is that it will reduce inflationary pressure. In a period of high unemployment it is harder for workers to demand wage increases therefore wage inflation is moderated. However, in the Great Depression of the 1930s, the mass unemployment caused deflation (falling prices – which is considered to be harmful

5. Social Problems. High unemployment can lead to social problems of crime, vandalism and social alienation, especially if concentrated amongst young workers.

More Entries on Unemployment 

By on January 23rd, 2008