Seven Causes of Unemployment

The True Causes of Unemployment

There are seven causes of unemployment. Four causes create frictional unemployment. This type of unemployment is when employees leave their job to find a better one. Two causes create structural unemployment. That is when workers' skills or income requirements no longer match the jobs available. The seventh cause leads to cyclical unemployment.

Frictional and structural unemployment occur even in a healthy economy. The natural rate of unemployment is between 4.5% and 5.0%, according to the Federal Reserve. The Bureau of Labor Statistics defines unemployed people as those who are jobless and have actively looked for work in the past four weeks. If they don't keep looking, the BLS doesn't count them in the labor force.

© The Balance, 2018

Four Causes of Frictional Unemployment

One cause of unemployment is voluntarily leaving the workforce. Some of the unemployed have saved enough money so they can quit unfulfilling jobs. They have the luxury to search until they find just the right opportunity. The second cause is when workers relocate. They are unemployed until they find a position in the new town.

The third cause is when new workers enter the workforce. This includes students who graduate from high school, college or any higher degree program. They look for a job that fits their new skills and qualifications. That is a primary cause of youth unemployment.

The fourth cause is when job seekers re-enter the workforce. These are people who went through a period in their lives when they stopped looking for work. They could have stopped working to raise children, get married or care for elderly relatives. These four causes are an unavoidable part of the job search process. The good news is that frictional unemployment is usually voluntary and short-term.

Two Causes of Structural Unemployment

Structural unemployment is neither voluntary nor short-term. These next two causes lead to long-term unemployment. The fifth cause is advances in technology. This is when computers or robots replace workers. Most of these workers need more training before they can find a new job in their field.

The sixth cause is job outsourcing. That is when a company moves its manufacturing or call centers to another country. Labor costs are cheaper in countries with a lower cost of living. This situation occurred in many states after NAFTA was signed in 1994. Many manufacturing jobs moved to Mexico. It also occurred once workers in China and India gained the skills needed by American companies. 

What Causes Cyclical Unemployment

The seventh cause of unemployment is when there are fewer jobs than applicants. The technical term is demand-deficient unemployment. When it happens during the recession phase of the business cycle, it's called cyclical unemployment. 

Low consumer demand creates cyclical unemployment. Companies lose too much profit when demand falls. If they don't expect sales to pick up anytime soon, they must lay off workers. The higher unemployment causes consumer demand to drop even more, which is why it’s cyclical. It results in large-scale unemployment. Examples include the financial crisis of 2008 and the Great Depression of 1929.

Raising the Minimum Wage and Demand-Deficit Unemployment

Demand-deficit unemployment sometimes occurs when wages are too high. That's one of the arguments against higher minimum wages. Critics argue that when businesses are forced to pay a higher salary per person, they must let other workers go.

In some price-sensitive industries, that's true. But most companies can pass the cost onto their customers. 

Not All Causes of Joblessness Create Unemployment

If someone gives up looking for work, on the other hand, the BLS does not count them in the unemployment rate. If someone retires, goes back to school or leaves the workforce to take care of children or other family members, that is not unemployment because they no longer look for work. Even if they would prefer a job, the BLS doesn't count them as unemployed unless they looked in the past month.

People who have searched in the past year, but not the past month, are called marginally unemployed. The BLS calls this the “real unemployment rate.” Some people say the government undercounts unemployment by reporting the official rate, rather than the “real” rate.

Key Takeaways

  • For the BLS, unemployment is the state in which one has no job and has been looking for work for the past month. Those who have stopped job searching are not counted as part of the unemployed labor force.
  • Unemployment may be classified as either a frictional, structural, cyclical, or demand-deficit type.
  • The natural rate of unemployment is between 4.5% and 5%.
  • Unemployment is a key economic indicator. High employment rates can be symptomatic of a distressed economy. Conversely, very low unemployment rates can signal an overheated one.

Article Sources

  1. The National Bureau of Economic Research. “Structural/Frictional and Demand-Deficient Unemployment in Local Labor Markets,” Accessed Dec. 6, 2019.