How does unemployment effect economic growth of a country?
Answers
Answer:
Explanation:
Conventionally, most people will define unemployment as lack of jobs for the working population (people able and willing to work) hence ignoring the other factors of production that are also critical to the economy. We think of jobs created in the economy versus the number of able and willing workers to explain levels of unemployment. While human capital is critical, the economy works on a wide spectrum of sectors that each of the other factors of production take precedence depending on its use. For example, land is critical in agriculture than human capital which has been mechanized in that sector. In investments, capital is more critical than land and personnel.
We should also add in the definition of unemployment from simply “lack-of” to “under-utilization” of factors of production. A medical doctor gainfully employed as a street cleaner or arable land being used as a dumping site does not translate to employment. That is under-utilization of factors of production which should be a critical component in defining unemployment. In most developing countries, scarcity of jobs breeds desperation. It is thus common to have overqualified staff in an organization. Under-employment is critical in addressing the question of economic effects. The training, knowledge, skill, time and other resources in (input) the doctor does not translate to the expected contribution (output) hence a negative effect or in economic terms, diminishing returns.
To then address the question of the effects and influence of unemployment in economic growth, we have to look at all the factors of production, their application, utilization and the levels of utilization and above all, their adequacy in all the sectors of the economy. Taking the earlier example, if a country’s economy is heavily dependent on agriculture, land utilization becomes critical. For another with high dependency on the service industry, people are the drivers. The weights attached to the influence of each factor of production to the overall contribution to growth and effect to the economy will thus vary.
Any factor of production that is not utilized or under-utilized affects the output levels of the production process hence economic growth. If skills or manpower, land or capital are idle, the economy is not gaining from these resources. Effective and efficient employment of all these result in positive growth and vice versa. For efficient economic output, factors of production should be efficient enough to equal or exceed their input levels. Assuming no wastage in the production process and the resultant output and optimum distribution of the same, growth will be realized.
Think about it, all these factors of production also earn when employed. These earnings are saved, spent and/or invested. This increases circulation of money in the economy and demand for goods and services. This is the economic cycle of growth.