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What Is the Connection between Macroeconomics and Unemployment?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 18 November 2016
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The relationship between macroeconomics and unemployment is the fact that unemployment is one of several macroeconomic principles. Macroeconomics deals with economic issues from a national standpoint, in contrast to microeconomics, which is more individual. The measurement of the rate and form of unemployment in a nation is one of the indicators of the state of the economy. A decrease in the rate of unemployment is indicative of a downturn in the economy, with ripple effects that further affect other economic variables.

Sudden declines in employment rates that were previously high may be attributed to factors like a decrease in demand, change in taste and seasonal changes. This is a relationship between macroeconomics and unemployment because one of the indicators of a possible recession is a sharp decline in the rate of demand for goods and services by consumers. Inflation is another macroeconomic factor that causes the prices of goods and services to increase over time. When this happens, money will not be able to go as far as before, leading to a decline in the demand for such goods and services. During such a period, most companies will lay off some of their excess staff in a bid to save the money that would have been used to pay for services no longer in demand.

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Changes in the tastes and preferences of customers also lead to a shift in demand, which may catch some manufacturers or producers unaware. For example, a company that produces teen products will have to conduct constant market surveys and also study and anticipate new trends in teen products. If an apparel company is hugely successful with the sale of purple jeans over the summer period and hires new employees to meet up with the demand for the product, such a company will have to anticipate when the preference has shifted to blue jeans. This is to avoid getting stuck with unwanted merchandise, which would lead to a loss in sales revenue and the disengagement of numerous workers due to the decline in demand. Unemployment that is caused by change in tastes can also contribute to aggregate national unemployment rates, which is another link between macroeconomics and unemployment.

Seasonal unemployment refers to types of unemployment that are caused by a reduction in demand for seasonal products or services. Macroeconomics and unemployment are also linked by the effect that unemployment has on other economic factors. Workers are consumers as well, and when they do not have any money to spend due to unemployment the aggregate demand for goods will decline even further. It also leads to an increase in the demand for unemployment benefits and other welfare packages, putting a strain on the government budget.

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