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How Does Unemployment Affect SMEs?

Employment rates are measured closely as an indicator of the health and state of the economy. Find out how differing unemployment rates are likely to affect your business, and how you can position yourself to succeed when unemployment rates change.
How Does Unemployment Affect SMEs?

Updated on 26th June 2020

For small businesses, having both an understanding of the current unemployment rate in the UK and an eye on the job market can help to identify new opportunities. After all, the unemployment rate can affect your business at a number of different levels- ranging from your product/service sales to your recruitment processes and team.

In this article, we’re going to explore how unemployment affects businesses by taking a close look at:

We’ll also touch on the economy and provide some handy tips throughout, but first- where does the modern idea of unemployment come from?

A brief history of UK unemployment

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Employment records were first started in 1971, and the main way in which we interpret them today is through looking at the ‘unemployment rate’. The unemployment rate tracks those who are out of work, looking for work, and available for work- and it’s calculated every three months based on a sample size of around 53,000 households.

Employment rates often reflect the current strength of the economy. In a flourishing and positive economy, unemployment rates are typically low- whereas in a struggling economy filled with uncertainty and pressures, you’ll typically find slightly higher unemployment rates.

So, what are the effects of unemployment on a business?

What are the pros and cons of different unemployment rates?

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According to the Office of National Statistics (ONS), the unemployment rate in the UK has ranged from around 4,4% to 3.8% since 2017. The latest data for Jan-Mar 2020 indicates that over 16’s unemployment is at around 3.9%, and here’s what that means for SMEs.

The advantages of low unemployment rates

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When unemployment rates are low, it means that more consumers probably have money to spend on the goods and services they need. Being employed could give consumers an increased sense of confidence- which may feed into their buying habits; making them more likely to purchase goods in general.

Obviously, this benefits businesses greatly. When seeing an increased demand for their products and services, business owners will likely be happy- and they may emulate that sense of purchasing confidence by making more investments into their own businesses and pursuing growth strategies.

So low unemployment means happy consumers, who spend more- which benefits businesses. But healthy profit margins aren’t the only positive outcome associated with low unemployment rates. With low unemployment often comes a healthy economy- which broadly involves people feeling a heightened sense of wellbeing through not having to worry about pinching pennies, and potentially better job security as the risk of being laid off due to business’ financial struggles is decreased.

How can I make the most out of a period of low unemployment?

As a business owner, you could make the most out of a period of low unemployment by leveraging your successes to set up for the future, and implementing retention strategies to keep your employees motivated; encouraging them to stay with you at a time when jobs are abundant.

The disadvantages of low unemployment rates

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Unemployment can be challenging and upsetting, and we wouldn’t wish it upon anyone. For businesses, however, low unemployment rates aren’t a purely positive thing- there are some downsides.

One of these downsides is that when employment levels are high, the potential pool of employees you have to choose from is more shallow than it would otherwise be. Talent is incredibly important to businesses. So, for a business owner creating a new job role, it may be worrying to see a limited selection of prospective employees- especially if the job role in question is time-sensitive.

What could I do in light of this?

For business owners, it may be worth updating your job descriptions to ensure that you’re accurately reflecting the role you’re offering. Also, offering a competitive salary and having a thorough interview process could help you to attract the best possible talent for your business. Then, you just need to give them a proper welcome.

The impact of unemployment on business

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For each of the points around low unemployment rates we’ve covered in this article, the opposite is also true. High unemployment rates indicate consumers are less inclined and able to spend money. They may also mean that your employees may be worried about job security, and that the economy may be struggling.

Low unemployment rates, therefore, seem desirable. They may suggest that turnover is high for businesses, despite making keeping and finding the best staff a little more expensive. This is a complex formula- as having increased staffing costs could potentially increase both inflation and costs from suppliers- what’s important is that you’re taking steps to make your business attractive to new talent and competitive within your market.

It’s good to be aware of the challenges that different rates of employment pose. But ultimately, low unemployment rates seem better for business. They indicate a healthy economy, which generally creates the right conditions needed for businesses to have a good chance of thriving.

You can find out about the UK’s current unemployment rate on the Office of National Statistic’s website.

How could Esme Loans help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus and want to understand the support available to you, please visit our advice page for information.