Q:

How does the unemployment rate affect the economy?

A:

Quick Answer

The unemployment rate affects the economy's debt, taxes and overall growth. When a person loses a job, he is no longer able to pay his debts or taxes, and he spends less. All of these things can be devastating to the economy.

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Full Answer

If a person is unemployed, he is unable to pay debts such as credit card balances, mortgages and car loans. The more debt a person has, the less money he has to put back into the economy. Too much debt also makes interest rates go up. High interest rates prevent people from borrowing, which prevents the economy from thriving.

Paying taxes is also hard for the unemployed. There are federal and state taxes that are in place to keep the economy running smoothly. When the number of citizens paying taxes decreases as unemployment increases, this creates a financial deficit for the government in many ways. Without enough money being paid into taxes, there is no funding for things such as law enforcement, courts and government programs. This results in an economic downturn.

If someone is unemployed, he has less money to spend on discretionary items. Most of his money is spent on necessities such as rent, food and utilities. Less spending can lead to overproduction and less profit in many markets of the economy.

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