Why does government want to have low unemployment?

Answer 1

Unemployment affects the economy and its people through output and distributional effects;

The output effects pertain to the productive capacity of the economy as a whole and include:

The creation of a GDP gap, which inhibits growth by leaving the economy 'under employed'. This means that the full economic potential of the economy is not being utilised because of a labour deficiency, thus eroding the living standards and the level of economic activity (All other things being equal).

Furthermore it creates a loss of production possibilities, that is, the economy is not producing to its fullest potential, which in turn, lowers the future prospects of increased economic performance.

There is also an opportunity cost associated with unemployment, in that those unemployed labour resources could be more productively allocated for he benefit of the macroeconomy.

Furthermore, there is a social dimension, as unemployment creates social problems, characterised by an inequality of sacrifice. These problems have occurred historically in periods of Depression, such as The Great Depression, in which unemployment reached 29% in Australia. Unemployment, all other things being equal, places greater stress on social services and welfare, and thus creates distortions in resource allocation, insofar as government expenditure on welfare increases which generally pilfers funding for government investment, etc.

Distributional effects refer to the disparities and social equity issues unemployment creates, for example, long term unemployment often requires people to draw on their savings to finance living expenses, and hence, aggregate savings fall (All other things being equal). The ramifications of this are significant, in that it creates long term financial difficulties. Furthermore, the income hierarchy is not equally affected by unemployment, with historical periods showing us that demand deficient unemployment has a greater effect on lower income earners (The working classes and unskilled people). This disparity exacerbates social divisions, which, in the government's context is politically volatile and dangerous.

So, now I've gone through the ramifications of unemployment, it is apparent that elevated levels of unemployment (Mainly caused by demand deficiency) have inherent and negative social consequences as well as macroeconomic repercussions all of which are undesirable. As I have gone through, unemployment also places a notable strain on government revenue (With tax receipt theoretically decreasing coupled with increasing welfare liabilities.)

Therefore, there is an issue pertaining to macroeconomic management as well as political perception, and it is unsound for a government to neglect unemployment. The social problems created are likely to decrease public support for a government and more importantly, the macroeconomic credentials of the government are likely to be compromised.

It is , therefore advisable for a government to maintain a rate of unemployment close to the 'natural rate of unemployment' which is defined as a circumstance in which there is no cyclical (demand deficient) unemployment, and the only recurrent unemployment figures are related to frictional unemployment or structural unemployment (both of which theoretically are economically beneficial in the long term). This natural rate was originally defined as 6%, however, the increasing mechanisation of the economy increases accessibility, lowering it to around 4.5-5%. This figure, however, is different in different countries.

I hope that answers your question thoroughly enough.

Answer 2

So that their economy will be stronger and the country will have more opportunities as a result.

Answer 3

When there is low unemployment, more people are working and paying taxes, and there are fewer people in need of government funded assistance.