Context: Many recent university graduates in China are struggling to find employment, even though industries such as electric vehicle production and scientific research need skilled workers, with youth unemployment worsened by prolonged COVID-19 lockdowns.
Introduction
Unemployment is a major macroeconomic issue that governments around the world, including China, monitor closely. It refers to a situation where individuals who are willing and able to work at prevailing wage rates cannot find employment. When unemployment is high, it represents a failure to make full use of a country's labour resources, leading to both economic inefficiency and social costs. Governments regard high unemployment as a serious concern because it affects overall economic output, worsens the fiscal position and can trigger longer-term structural issues.
Underutilisation of resources
From a macroeconomic standpoint, high unemployment reflects an underutilisation of labour, one of the key factors of production. Economics is fundamentally concerned with scarcity, the idea that resources are limited while human wants are infinite. Labour, as a scarce and valuable resource, should ideally be employed to produce goods and services that improve societal welfare. When a substantial portion of the labour force is unemployed, the economy fails to operate on its Production Possibility Curve (PPC) and instead operates within the curve, indicating it is producing less than its full potential. This inefficiency means fewer goods and services are available to meet the population's needs, which can result in lower living standards. In China's case, even as sectors such as electric vehicles and scientific research report worker shortages, many recent graduates remain jobless. This mismatch suggests labour market inefficiencies or rigidities, such as skills mismatches or poor labour mobility, are contributing to underemployment. The longer these individuals remain outside the workforce, the more their skills may depreciate, compounding the problem and worsening the waste of human capital.
High fiscal costs and a worsening budget position
Beyond resource inefficiency, high unemployment imposes a significant fiscal burden. The budget position, calculated as government revenue minus expenditure, can deteriorate sharply when unemployment is widespread. On the expenditure side, governments often provide unemployment benefits, welfare payments or social assistance to help individuals meet basic needs while they search for work. These transfer payments are non-productive, in that they do not directly increase output, but are essential for maintaining social cohesion and preventing poverty, and as the number of unemployed rises, these outlays increase significantly, putting upward pressure on government spending. At the same time, government revenues decline. Unemployed individuals do not earn wages and therefore do not pay income tax, a major revenue source, and with lower disposable income, consumer spending falls, reducing indirect tax revenue such as value-added tax. This twin effect, rising spending and falling revenue, leads to larger budget deficits.
If the fiscal deficit persists, the government may be forced to borrow more by issuing bonds, increasing national debt. Servicing this debt comes at a cost, as interest payments consume budgetary resources that could otherwise fund infrastructure, education or healthcare. In the long term, this crowding out of productive expenditure may hinder the government's ability to invest in growth and development, creating fiscal rigidity and reducing future policy space. High public debt can also affect a country's credit rating, increase borrowing costs and dampen investor confidence, especially in open economies exposed to capital flows.
Conclusion
Governments view high unemployment as a serious concern because it signals both economic underperformance and creates fiscal strain. Unemployment leads to inefficient use of labour, causing the economy to produce below its capacity, which affects growth and living standards. Simultaneously, it worsens the budget balance, increasing government spending while reducing tax revenue, and can contribute to rising national debt. These outcomes weaken short-term macroeconomic stability and pose long-term threats to a country's economic resilience and global competitiveness. Tackling unemployment, especially among youth, is therefore a critical policy priority for any government seeking sustained economic progress.