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How do unemployment, under-employment and discouraged workers affect GDP in an economy

How do unemployment, under-employment and discouraged workers affect GDP in an economy - Research Paper Example

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This is because the more the individuals who earn income, the more they contribute to the growth of the economy through taxation and development. However, when the employment level is low, it means that…

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How do unemployment, under-employment and discouraged workers affect GDP in an economy

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Subject: Macro & Microeconomics
Type: Research Paper
Level: High School
Pages: 4 (1000 words)
Downloads: 2
Author: isom10

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The second one that is known as underemployment occurs when workers underutilize their skills in their current employment, and the last one takes place when individuals stop finding jobs because they are discouraged with their fruitless effort of finding one (Thompson 78). All these forms of unemployment lower the Gross Domestic of a country. This paper will analyze how unemployment, discouragement, and underemployment lower GDP. First of all, when individuals finish school, they start seeking employment in the labor market.

Some become lucky and get jobs while others remain on the search. The state refers to those who fail to get employed at the existing wage rates as the unemployed. These individuals continue depending on their parents for funds that help them to survive and continue with the job search. The unemployed may also depend on their friends who were lucky to get jobs after school. This further increases the dependency ratio in the economy. This means that the individuals, who support the unemployed by giving them funds, reduce the amount of income that they save and invest (Thompson 81).

They instead increase the amount of money that they set apart for consumption. The reduction in savings means that these individuals earn less interest than they used to earn before. The reduction in interest rate then means that they earn less income from investment activities and this reduces the overall income of a country. The effect of this unemployment is based on Okun’s law that states that a 1% increase in the rate of unemployment leads to a 2% decrease in the GDP (Boyes and Michael 226).

The other form of unemployment takes place when workers discontinue their job search because of hopelessness. These individuals lose hope based on the belief that they will never secure a job in the labor market at the existing wage rates. The loss of hope makes these individuals to either continue depending on their relatives and friends or engage in

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