Does low unemployment really benefit a country?
- Irrational Economists
- May 26, 2022
- 2 min read
Srivatsan Jumbunathan
Unemployment is defined as a term where an individual is seeking a job but is unable to land any work offers. Many countries strive to maintain a low unemployment rate, and while some are successful, many are not. The countries with the lowest unemployment rates are Qatar and the Solomon Islands, while countries with the highest unemployment rates are South Africa and Djibouti. As much as low unemployment looks appealing, there is more than what meets the eye.
Low unemployment levels could in theory lead to lower productivity. If all the jobs are taken up, any increase in job openings will not lead to an increase in the total output generated by a firm. Hence, it could lead to workers idling, where they are functioning at a level below total efficiency. Hence, more people would be required to finish the work which was left undone, requiring them to put in more efforts, taking a higher toll on their bodies. In the same way, low unemployment levels could result in a form of inflation as well – wage inflation. When supply of labour is low, it leads to higher wages, where price plays the role of an incentive function for firms to attract workers in order to get jobs done. However, this also has a second-hand effect on the productivity, as some firms may have to look at less talented workers, due to the dire need to attract job offers. Due to the higher wages paid to lesser skilled talents, some firms may not have the financial capabilities to pay these salaries, and hence, they turn to other opportunities, and hence, are compromised due to the low unemployment levels in the country.
Despite this, low unemployment does have its benefits as well. Low unemployment leads to a more efficient use of Factor of production (FOP). Thus, any welfare loss is negated, and the economy is placed in an advantageous position. Moreover, households now have a higher disposable income, and when they spend it, aggregate demand (AD) increases. AD is a direct determinant in the real GDP, and hence, an increase in AD leads to an increase in real GDP, which once again is a benefit to the economy.
In conclusion, a low unemployment rate does have some cons which tend to be overlooked in certain times. Hence, governments should always be ready to implement measures to either decrease unemployment, or any other form to tactically place the economy in a more advantageous position, which benefits the country.
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