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Loss of skills – When someone becomes unemployed they will stop working and will startlosing their skills and ability to work. The longer someone stays unemployed, the less
employable they will be to firms because firms will need to spend money on retraining them.Loss of confidence/depression – People who are unemployed will also suffer a loss of confidence in their ability. Many people who become unemployed will also suffer stress related illnesses and depression.Key termsDiscouraged workers– These are people who are unemployed for so long that they eventually give up the search for a job and leave the labour market.Gross domestic product (GDP) – This is the total value of all goods and services produced in an economy during a set period of time.Inferior goods – These are goods that are of inferior quality to other products and have negative income elasticity.Labour force – The labour force is the total amount of people who are willing and able to work. It is also referred to as the number of employed people plus the number of unemployed people.
Normal goods– These are goods that we buy more of as incomes rise and we consider them as luxury.Supply side policies– This is when the government uses policies to increase the aggregate supply in the economy.Taxation - This is the money collected by governments from people’s earnings, wealth or spending.Unemployment rate – This measures the percentage of people in the labour force who are unemployed. If the labour force is 10 million and there are 1 million people who are unemployed, the unemployment rate is 10%.Economic Costs of UnemploymentLoss of earnings to the unemployedThose who are unemployed will find it more difficult to get work in the future (this is known as the hysteresis effect)Stress and Health problems of being unemployedIncreased govt borrowing (PSNCR). Tax revenue will fall because there is less people paying income tax and VAT. Also the govt will have to spend more on unemployment benefits.Lower GDP for the economy, the economy will be below full capacity this is inefficient and will lead to lower output and incomes.Increase in social problems. Areas of high unemployment (especially youth unemployment) tend to have more crime and vandalism.Unemployment - Benefits and CostsBack in the early 1990s, as the economy plunged into recession, the then Chancellor of the Exchequer, Norman Lamont said in the House of Commons - 'Unemployment is a price worth paying for lower inflation.' It was a similar sentiment shared by Mrs Thatcher in the 1981 recession. Yes, her policies were causing unemployment, but, she would claim it was an inevitable price for dealing with the inflation she inherited. 365 economistswrote to the Times claiming her policies were flawed, but the Iron Lady was not for turning. Unemployment stayed close to 3 million until 1986.