7 Main Causes of Unemployment

Causes of unemployment
People have their resumes reviewed during the Arizona Workforce Connection Career Expo at the Arizona State Fair Grounds on March 31, 2010 in Phoenix, Arizona.. Photo: Joshua Lott/Getty Images

Unemployment is caused when someone is laid off, fired, or quits and continues to look for a job. If they don't keep looking, the Bureau of Labor Statistics does not consider them unemployed. Instead, they are out of the labor force.

Four Causes of Frictional Unemployment

One reason for unemployment is voluntary. Some of the unemployed have saved enough money so they could quit unfulfilling jobs. They have the luxury to search until they find just the right opportunity.

The second cause is when workers must move for unrelated reasons before they can start searching for new jobs. The third reason is when new workers enter the workforce. That includes students who graduate from high school, college or any higher degree. They have more skills than if they didn't go to school. That's a major reason for youth unemployment.

The fourth reason is when job seekers re-enter the workforce. They went through a period in their lives when they stopped looking for work. These include mothers who are rejoining the workforce after their children are old enough. Other reentrants might have gotten married and set up the household while their spouse worked. Other reentrants had to care for elderly relatives before returning to the labor force. 

These four situations all cause frictional unemployment. They are an unavoidable part of the job search process. However, the good news is that it's usually short-term.

Two Causes of Structural Unemployment

The fifth cause is not voluntary.  Advanced technology, such as computers or robots, replaces worker tasks with machines. Most of the workers need retraining to obtain the skills required to get a new job.

The sixth cause is job outsourcing. That's  when a company moves its manufacturing or call centers to another country.

Usually, it's because labor costs are cheaper in countries with a lower cost of living. That 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. These are the two causes of structural unemployment. That's when workers' skills, or income requirements, no longer match the jobs available. 

These are the six causes of natural unemployment. They always occur, even in a healthy economy. The natural unemployment rate is between 4.7% and 5.8%, according to the Federal Reserve. 

What Causes Cyclical Unemployment?

The seventh cause of unemployment is when the supply of jobs is less than the demand. That's called demand-deficient unemployment. It's usually created by an economic downturn. That results in large-scale unemployment. Consumer demand slows enough that businesses lose too much profit. If they don't expect sales to pick up anytime soon, they must lay off workers.

That's what happens during the recession phase of the business cycle. That causes cyclical unemployment. A recent example was the financial crisis of 2008. Unemployment rose to 25% of the population during the Great Depression of 1929.

Do Minimum Wages Cause Demand-Deficit Unemployment

Occasionally demand-deficit unemployment occurs when wages are too high. That's one of the arguments against higher minimum wages.It says that businesses have a fixed cost for labor. When they are forced to pay a higher wage per person, they must let other workers go. In some price-sensitive industries, that's true. But most other companies can pass the cost onto their customers. (Source: "Structural/Frictional and Demand-Deficit Unemployment in Local Labor Markets," National Bureau of Economic Research, July 1988.)

Not All Causes of Joblessness Create Unemployment

If someone gives up looking for work, on the other hand, they are not counted as unemployed by the Federal government. If someone retires, goes back to school or leaves the work force to take care of children or other family members, that is not unemployment. That's because they no longer look for work. Even if they would prefer a job, they aren't considered 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.  For this reason, some people say the government undercounts the real unemployment rate

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