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Economists say there will always be a certain amount of unemployment in any economy, and this cannot be avoided. However, too much unemployment can be highly detrimental to an economy. Unemployment’s harmful effects are felt by individuals, society as a whole and by the government as well. 

Unemployment effects on the individual 

Most everyday people are significantly dependent on their job to provide them the finances necessary to pay for basic daily living needs. This means when most individuals become unemployed or underemployed their quality of life is immediately diminished to a certain degree. Even with unemployment benefits provided by the government, it is usually not enough assistance to maintain the same level of spending necessary to maintain a person’s previous standard of living. 

This means unemployed individuals will be forced to spend less on consumer goods and services. For example, this could mean a person will have to stop eating out at restaurants, maybe quit paying for the gym and possibly even eat less meals per day. Of course, less consumption means the individual will no longer be contributing to the growth of the economy in the same amount as before. 

Additionally, the longer a person is unemployed the more likely his or her work skills start to deteriorate which ultimately denies the economy the productive capacity of a certain amount of skilled labor. Also, unemployment can result in families having to deny educational opportunities to children which will diminish productivity as workers in the future. 

Unemployment effects on society 

There is also a significant cost to society as a whole when unemployment is too high for too long. Unemployment commonly leads to political pressure on lawmakers to implement more protectionist policies. These types of policies aim to restrict international trade with the objective of helping domestic industries compete in the global market. This can also mean more restrictive immigration policies. This can result in global trade wars between countries which end up hurting economic growth for all countries involved. 

Unemployment effects on a government 

When unemployment is out of control it can make a serious dent in the financial stability of the government at the federal, state, and local level. When people are unemployed they may be eligible to receive various types of assistance from the government. This can include unemployment insurance benefits, Medicaid, and food assistance. These payments to unemployed recipients can strain the government budget which can result in less resources for other government programs, reducing governmental stimulus which would normally be helping the economy grow. 

How should investors react to high unemployment? 

Many investors keep a close eye on changes to the unemployment rate in order to spot potential future downturns in the economy. This can result in weakness in asset valuations. If unemployment persists it can eventually lead to a recession which will see asset prices drop precipitously. 

Investors will want to have their portfolios positioned in a way to minimize risk of loss in these scenarios. However, what this means will be different for each situation. Comprehensive analysis of financial conditions and macroeconomic factors will determine the adjustments necessary for your portfolio.