Question

In addition to the payment of unemployment benefits, discuss why extra costs are borne by the federal government during times of rising unemployment

Answer 1

Unemployment is not desirable because of the costs it imposes on the economy. There is a natural level of unemployment that will persist in the economy even when it is functioning at full employement level. However, an unemployment above the natural level is costly for the federal government. When there is increasing unemployment, the government has to increase payments to the unemployed which increases its expenditure. At the same time, the government will see a fall in revenue as they do not earn the same level of taxes from income as before.

One of the costs that the government has to bear is because of the rise in crime rate which accompanies rising unemployment. Usually it is seen that when unemployment increases, there is an increase in the crime rate as well. The government will have to bear the cost of controlling the crime rate.

Unemployment has a negative impact on the health of the economy. The level of investment and the demand for goods and services reduces. This will have an impact on the Gross Domestic Product (GDP) and the government has to incur expenditure to boost investor confidence.