Why is a low unemployment rate good?

Written by neil kokemuller Google
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Why is a low unemployment rate good?
Unemployment has a negative effect on self esteem. (Getty Thinkstock)

Low unemployment rate is good for the individual and the wider community. Those who work feel better about themselves and can afford to spend more. With low unemployment rates, those who work can demand higher wages and feel more secure in their jobs. The economy benefits from increased activity and governments receive more tax money, which can then be spent on schools or hospitals. Low unemployment also tends to have a positive effect on social divisions in the society.

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What is Low Unemployment

There are no precise definitions as to what can be called low or high unemployment, but most economists agree that the line between the two can be drawn somewhere between 4 to 7 per cent of the workforce. When a country gets below, say, 4 per cent, entry level jobs become quite expensive for employers, which can lead to inflation. On the other hand, with unemployment above 7 per cent, spending goes down, especially on big purchases such as houses, furniture and cars. That tends to have a domino effect on the rest of the economy.

Benefits for the Economy

When unemployment is low, it means that the economy is in good shape because there is demand for labour. Firms are busy and workers are able to negotiate better wages. The overall economy benefits from increased tax receipts -- both from firms and workers -- and lower spending on welfare. People in steady jobs tend to spend more on new homes, cars or holidays, thus giving the economy a further boost.

Workers' Bargaining Power

In times of low unemployment, workers have more power to demand higher wages because they know they cannot be easily replaced. Conversely, during high unemployment businesses have more bargaining power because both they and their workers are aware of the competition and that replacing workers is easier.

Lower Welfare Spending

More people working means fewer people claiming welfare. With lower welfare spending, governments can put more money into new schools or hospitals. Furthermore, there are statistical links, although not concrete evidence, between high unemployment and increased spending on health care and policing, which suggests that areas with high unemployment rates tend to have higher crime rates, too, coupled with the local population's poor health.

Social and Psychological Effects

Those who work generally feel better about themselves. On the other hand, as Baumol and Blinder write in "Economics: Principles and Policy," high unemployment has been linked to psychological and physical disorders, divorce, suicide and crime. In times of, or areas with, high unemployment divisions in society tend to increase, with those unable to find work losing self-respect, purpose and a sense of achievement. At the same time, those who are employed feel less secure and less willing to leave unsatisfactory jobs.

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