How Does a High Unemployment Rate Affect Business?

A high unemployment rate has effects on both businesses and on individuals.  These are interconnected and will affect one another cyclically.  The unemployment rate itself is a percentage of unemployed workers in the total labor force.   

The rate does have some exclusions, such as students, homemakers, but also people who are jobless because they have been in the job market unsuccessfully for so long that they have stopped looking for employment.  Being that discouraged workers are not accounted for, the rate is below what the actual demand for work is. 

Despite this difference, the rate itself provides a reasonable snapshot of the supply and demand differential.   

When there is high unemployment, and the economy starts to turn, people as individuals will spend less money.  People tend to fear job loss and will tighten up spending just in case a job loss occurs. 

Individuals who do experience job loss for a prolonged amount of time may experience a disintegration of their abilities, as unpracticed skills and talents revert.  It can also cause families to limit educational and skills development opportunities for themselves or their dependents, which may, in turn, limit their potential and future abilities. 

“A lack of jobs results in a lack of spending and this contributes to a stalled economy. The higher the unemployment rate, the slower the economy’s recovery. When fewer people spend money, businesses can’t succeed and may ultimately close their doors.” (Entreprenuer.com) 

A high unemployment rate can cause a business to change.  Managers can observe the changing labor market and implement changes in marketing their organization to new potential consumers and change their recruiting efforts.  This may also lead to changes in wages and in benefit offerings, which can retain employees on a long-term basis, keeping them there when the Unemployment Rate lowers. 

A high unemployment rate can also affect the value of a business: 

“Unemployment rates are a lagging economic indicator. Most sophisticated investors view an increase in unemployment rates as a sign that the economy is worsening and remain cautious — that is, unless you are selling a recession-resistant business. 

If you are expecting to sell your business to a sophisticated corporate buyer, a high unemployment rate can mean you have more difficulty finding the right buyer.” (MorganandWestfield.com) 

Joblessness benefits, such as Unemployment Benefits, are financed a great deal by taxes to a business.  This means that the higher the rate, the higher the cost to employers.  This can often encourage them to evaluate their spend. 

Many companies will try to cut costs as the economy begins to adjust, meaning they may reduce their workforce, adding more work to those remaining, which can reflect back on the affects to the individual’s mental health. 

 Retaining talented employees is valuable to business owners and investing in them is a way to safeguard a business from seeing their remarkable talent seek employment elsewhere. 

One way to retain employees and decrease unemployment is to have good initiatives for employees in the workplace, such as volunteerism, or profit sharing , to increase productivity.  

Motivating employees contributes to a positive work atmosphere, another reason why employees might choose to remain with a business.  Motivated employees can increase productivity and profitability. 

One of the best ways to promote workplace growth is by having management with strong leadership skills. 

Good managers can inspire employees to grow, contributing to a positive work environment and making employees feel encouraged to be productive and be excited about the future of their role in their organization. 

Employer Solutions Staffing Group (ESSG) can help lower unemployment costs to our clients by spreading the risk of fluctuating unemployment rates over a larger number of employees. By offering lower unemployment rates than most companies and reducing variability in those rates, businesses can depend on a more constant cost for their employees than they could on their own. Contact ESSG today to learn how we can turn one of your variable costs into a constant cost so you can better predict your profits for years to come.