The economic effects of unemployment

Opportunity costs

Unemployment means that the economy’s resources are not being used to their full capacity, the economy is thus operating below its production possibility frontier. There is also a lower output, which means lower household incomes and expenditure, lowering sales and profits. Higher Unemployment may lead to reduced business investments, production and economic growth
In 2022 and 2023, Australia's real wage growth was negative at its lowest level in almost two decades, even as job vacancies exceeded 480,000 

Lower living standards

Unemployed people have lower incomes (relying on welfare payments) and therefore lower living standards.
High unemployment, then requires employed people to contribute higher taxes to cover the unemployment welfare payments for the unemployed.

High unemployment results in lower production of consumer and production goods, resulting in a lower living standard. 

Decline in labour market skills for the long term unemployed

Persistently high unemployment, means the long term unemployed will lose their labour market skills, confidence, and experience and will become less employable or unemployable.
Cyclical/ short term unemployment can become long term structural unemployment (the process is known as hysteresis)

New members of the labor force will find it more difficult to develop skills if they are unable to find jobs soon after finishing education.

At March 2023, 72% of JobSeeker recipients had been on payments for over a year — a sign that hysteresis was already in operation for a significant share of the unemployed.

Costs to the government

High levels of unemployment can have a significant influence on the government's revenue and expenditure. High unemployment reduced household income, and therefore tax revenue. At the same time the government is burdened with an increase of transfer payments (welfare payments) to the unemployed as well as cost of training and labour market programs. Causing a deterioration in the Federal budget outcome

At March 2023, 72% of JobSeeker recipients had been on payments for more than 12 months — a significant ongoing fiscal drain. Australia's budget returned to a thin surplus in 2022–23 ($4.2bn) partly because unusually low unemployment boosted income tax receipts, then slipped back into deficit in 2023–24 as conditions softened. The 2026 budget projects a $31.5 billion deficit (1.0% of GDP), with social spending a key driver.

Lower wage growth

High unemployment means there is an excess of labour supply, which should lead to a fall in the equilibrium of wages, however ages do not often get reduced, instead it slows wage growth over time.

in 2022–23, even with vacancy records and unemployment near 50-year lows, real wage growth was negative — suggesting the decade of prior slow wage growth had anchored employer expectations downward, a form of hysteresis in wage-setting behaviour.

Economic Benefits

Encourages the labor force to increase education and skill levels

Makes the labour force more mobile

Encourages entrepreneurs to accept more risks readily

Creates the potential for higher savings and capital formation