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Unemployment is 'the number of people (of working age) who are willing and available to work at current wage rates, but not currently employed.'

If unemployment is high, then incomes are lower, and demand for goods and services is likely to fall. On the plus side, it may mean there is plenty of labour available and at lower wages, but this is of little use is this if there isn't demand for the goods and services they can produce.

Types of unemployment

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Impact of unemployment

Unemployment is bad news for both individuals and business. Those made unemployed normally lose part or all of their income and therefore their ability to spend at the same level. This in turn causes aggregate demand (total expenditure) in the economy to fall. Raw materials and resources fall in price as a result. Workers also see their 'power' reduced and this means that their representatives cannot bargain for such high wage increases.

Faced by a fall in overall demand, producers will seek to cut costs and labour is normally one of those they cut. Investment will also fall and this might be in people and training just as much as machinery. Those firms which suffer the most immediate impact on their performance might be vulnerable to take-over and that too can cause a reduction in the number of employees needed.

Governments will see tax yields fall in time of high unemployment. This may affect their spending plans, negatively affecting demand levels.