3.3.2 In addition, they will have to

3.3.2 Effects of Unemployment on Economy

Purchasing power decreases

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Purchasing power is one
of the elements affected by unemployment. When people in Malaysia are
unemployed, they do not receive any unemployed benefits such as other
countries. This means that they will not receive any income every month. They
will rather prefer to save than spend as their purchasing power decreased drastically.
In addition, they will have to spend wisely using their savings as it will only
decrease if they cannot get a job. As a result, their purchasing power will
drop, thus affecting the economy by decreasing the aggregate demand.


Living Standard

When high unemployment occurs, people in a family get
lesser income and will be lack of money in buying things. They will have to be
more careful with their spending on what are the things they need and what are
the things they want. They will have to make choices to get the thing they
needed the most as no extra allowance is allowed for them. At the same time,
government will increase the tax rates to boost the revenue by receiving it
from people who can afford to buy the items. In short, their purchasing power
will decrease due to the decrease in disposable income and increase in taxes.
Thus, standard of living will drop too.


Economic Contraction (Recession)

When unemployment
starts to occur, people around will feel insecure about their own job and think
that they must save more money in case unemployment happens to them too. This
will lead to people spending lesser compared to before and thus causing a decline
in the aggregate demand. When people are saving more, the demand falls
drastically, and the economic growth will be influenced. Furthermore, the circular
flow of income will be slowed down as the lack of income is not pumping the
economy anymore. Both of these above will lead to the fall in Gross Domestic


Government Revenue decreases

Many government in different countries have
the responsibility to pay the unemployed some benefits. If unemployment
increases, the government will have to spend more on these unemployed financial
costs. This will directly decreases the government’s revenue and affects the
government expenditure on health services, education, transportation, and so
on. However, in Malaysia, there is no unemployed benefits as the government encourages
people to sustain their life by working when they are able to. On the other
hand, when unemployment occurs, the spending power of household will decrease and
the government will receive less revenue through taxes.



Increase in debts

As government revenue falls due to unemployment,
it does not have sufficient amount of money to keep the economy stable and
maintain social welfare. The government will then increase the tax rates in
order to get more revenue and since unemployment is happening, people will have
to borrow money to buy things or to spend on monthly payments such as bills on
mortgage on housing, rent, insurance and utilities. However, it will accumulate
the amount of debts because it is hard for them to return the debts as they are
earning lesser. As borrowing increases, people may face bankruptcy. When most
of the people cannot afford to make payment, there will be deflation occurring in
the economy.


exploited by their organizations

The supply of human capital will be more than the
demand when unemployment takes place, resulting in organizations exploiting
their workers. Organizations will always try to increase their profit by
decreasing the cost of production, including the salary of the employees. When
everyone wants to keep their job, they have no choice to complain if their organizations
reduce their salary, all they can do is to accept the low wages. Therefore, the
average salary in a country will drop.