Why can unemployment reduce an economy's output?

Answer: Willing workers cannot use their labor in available paid production

Lost wages affect workers but cannot affect other businesses — Lost wages can affect businesses beyond the former employer. Households may cut purchases when income falls, reducing sales for shops and service providers. Support payments and savings can cushion that effect, so the size of the impact varies.

Each unfilled job makes the same work happen automatically elsewhere — Work lost through unemployment is not automatically carried out somewhere else. Other workers or machines may cover some tasks, but there is no guarantee that all the missing output is replaced. That is why idle labor can leave production below its potential.

Willing workers cannot use their labor in available paid production ✓ — When people want paid work but cannot find it, labor that could produce goods and services goes unused. Lost earnings can also reduce spending and weaken demand at other businesses. This does not mean an unemployed person does nothing useful: unpaid care and other household work still have value.