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What Is the Relationship between Economic Growth and Unemployment?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 24 November 2016
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Economic growth and unemployment are related because the two concepts are intertwined. The level of unemployment in an economy may affect the rate of economic growth, while the level of unemployment is also an indicator of the state of the economic growth of an economy. If economic growth is to be sustained, the general level of employment must not fall below a determined level. The moment the level of unemployment falls beyond this desired level, it becomes a detriment to economic growth.

This link between economic growth and unemployment can be explained in terms of the necessary output of services provided by employees needed to sustain an economy and to promote economic growth. When there is a high level of unemployment, the level of output also decreases due to the reduction in the number of workers contributing to the output. This correlation can be drawn from the fact that the level of unemployment is highest during periods of economic downturns. The opposite is in the case where there is a boom, or period of growth, in the economy.

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Another link between economic growth and unemployment is the fact that unemployment is one of the macroeconomic factors used by economists and other interested parties to measure the rate of growth or the current health of the economy. When the unemployment level starts to drop, it is usually in connection to other macroeconomic factors like an increase in demand for goods and services, which serve as the catalyst for the increase in employment. For example, when customers start to place a lot of order for products, a manufacturing company will hire more workers to keep up with the pace of demand. When the demand drops, these workers will be laid off as the company sheds unnecessary weight in order to conserve resources.

The relationship between economic growth and unemployment can also be seen in the manner in which unemployment deprives the government of necessary resources needed to develop the economy. When workers are unemployed, they will not earn any money, and the government will lose the income tax it would normally gain from such workers. Instead, the government might have to expend resources that could have been allocated to other developmental projects in the form of various types of welfare for the upkeep of the unemployed workers. Such welfare may be in the form of unemployment checks, food stamps and medical care.

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ddljohn
Post 3

@MikeMason-- Okun's law says that as unemployment rates increase, national GDP will decrease. If unemployment rates are going up in the US, it means that the economy is getting worse.

stoneMason
Post 2

I'm sure that there is a connection between economic growth and unemployment. I'm just not sure how strong this connection is.

The US economy is not doing that bad. It's not great, but we're not in a depression either. Yet, the unemployment rates have been rising. This is actually the case in most of the world nowadays. Why?!

turquoise
Post 1

I would like to propose another interesting connection between economic growth and unemployment. In countries where there are large numbers of youth without access to education and/or jobs, we see that youth engages in destructive behavior that negatively impact the economy of towns and cities.

For example, conflict and terrorism is a investment deterrent. Companies do not want to invest in places where there is trouble. The higher the number of unemployment in a country, I think the higher the possibility of conflict.

What do you guys think?

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