What is one effect of a high unemployment rate on an economy?

A high unemployment rate typically leads to lower GDP. When a significant portion of the workforce is unemployed, there is a direct reduction in consumer spending, as individuals without jobs have less income to spend on goods and services. This decreased spending negatively impacts businesses, causing them to generate less revenue, which can lead to further layoffs or reductions in hours for employees. Consequently, when consumption falls, overall economic output, measured by gross domestic product (GDP), tends to decline as well. Lower GDP can create a cycle of economic stagnation, amplifying the challenges presented by high unemployment.

In contrast, increased consumer spending, higher levels of investment, and higher government revenues are generally not outcomes associated with high unemployment. High unemployment typically leads to decreased consumer confidence and spending, reduced business investment due to uncertainty, and lower tax revenues for the government because fewer people are employed and generating income.