The impact of high unemployment | A-Level Economics Model Paragraph (AQA, Edexcel, OCR)

Unemployment occurs when people are willing and able to work but cannot find a job. If the unemployment rate is high, then more people will have low or no disposable income. Therefore, they wouldn't be able to afford as many goods and services so their living standards would decline. This would also have an impact on aggregate demand because consumer confidence, and consumer spending would both fall - and this is a factor of AD (AD = C + I + G + X-M).

AD LEFT SHIFT DIAGRAM

The diagram shows that the price level falls from PL1 to PL2 and real GDP falls from y1 to y2. If the government are unable to decrease unemployment quickly, this could lead to a spiral of low confidence, deflation, and further rounds of unemployment which would be damaging to the ecoonomy.

Also, high unemployment can cause further strain on the UK government beecause they have to contribute more towards unemplyoment benefits and they would generate less revenue from income tax. Furthermore, unemployment causes negative externalities such as crime or stress, which can impact the budget of the police or the NHS, and therefore the taxpayer.