How Is Unemployment Important to Economics?

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A country's unemployment rate tells more than just the percentage of the population that is without work. It shows how well businesses are sustaining growth and creating jobs, and how much consumers are spending on goods and services. Economists can look to a nation's unemployment rate to determine if an economy is close to rebounding or if a financial slide will continue.

Factor in Economic Production

The labor force is one of the four major elements of a working economy next to capital, resources and entrepreneurship, according to the Federal Reserve Bank of Dallas' website. Without a healthy and active labor pool, an economy cannot function properly. A healthy labor force allows businesses to maintain a high level of production and sustain steady growth. When unemployment is high, business production across the entire economy can slow down, resulting in a stagnation of growth and slipping production output.

Slowdown of Commerce

A high unemployment rate in an economy leads to a slowdown of spending and money circulation. Consumers must devote more money to bills and essential purchases such as groceries, postponing purchase of new cars or taking vacations. This leads to less money entering the market, and in turn causes profit losses in a variety of economic sectors. This phenomenon can cascade through many sectors of the economy and cause even more layoffs as companies must cut labor to eek out even the smallest profits and stay viable.

Everything Affects Labor

Just about everything in the economy, including changes in demand, population sizes and changes to the minimum wage rate, affect the labor market. Changes in a country's unemployment rate can be the first signs of economic improvement or a harbinger of a larger financial crisis, because the labor force is so sensitive to these economic changes. A government acting quickly in response to fluctuations in unemployment may be able to blunt the effects of an economic downturn or maximize the positives of an improving economy.

Changes in Consumer Confidence

Unemployment affects consumer confidence in the larger economy. Even consumers with jobs may stop spending and devote more money to savings if the unemployment rate in a country's economy begins to rise. This happens because consumers begin to fear the spread of unemployment across multiple business sectors of the economy and brace for possible job loss. This can actually become a self-fulfilling prophecy as the slowdown in spending may actually lead to layoffs.

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