What Are the Economic Causes of Unemployment?

From the viewpoint of your average citizen, the cause of unemployment is simple: you have lost or are unable to find a job. Yet from the viewpoint of an economics major, unemployment and its causes are more complicated (as are all ordinary things when they are examined by academia).

The first difference that economists will note is that unemployment comes in two types: voluntary and involuntary. Voluntary unemployment is unemployment caused by the worker choosing to be unemployed, such as willing quitting a job, no matter what the reason. Involuntary unemployment, on the other hand, is caused by the worker being unwilling laid off (fired).

Beyond these two types of unemployment, economic thinkers are interested in the exact reason for a person's unemployment. Economists generally divide unemployment into five sources (categories):

Seasonal

Frictional

Structural

Cyclical

Induced

Seasonal Unemployment is unemployment caused by the season (time of year). Amusement park workers in intemperate climates, ski instructors, temporary farm workers, department store Santas, are all examples of workers whose employment is based on the time of year. Many retail and restaurant workers are also affected by the change of seasons; as the seasons come and go, so do the jobs.

Frictional Unemployment is simply the opportunity cost of looking for a new job. If you chose to quit your old job to look for a new one, the time that you are unemployed and looking for a new job is referred to as frictional unemployment.

In reasonable amounts, this source of unemployment is considered natural and healthy for an ongoing economy; some economists estimate that in an industrial or informational economy that there should be a natural unemployment rate of four percent, with the majority of unemployment being frictional.

Derivations from this estimated ideal, according to economic theory, cause problems for the economy; high unemployment rates leading to lower wages for workers, and low unemployment rates leading to increased costs for companies and employers.

Structural Unemployment is caused by a lack of skills for employment. As the need for skilled and educated workers increase for employers, the employment opportunities for those without a college education decrease leading to higher structural unemployment among those with only a high school education or less. Out of all the sources of unemployment, structural unemployment is the only one with a readily available, though time-consuming solution: more education.

Cyclical Unemployment is caused by the business cycle itself, either on a company (microeconomic) level or a regional (macroeconomic) level. The natural life cycles of businesses (downturns, overextensions, etc.) and nations (inflation, deflation, recessions and depressions) are the cause of cyclical unemployment. It is this type of unemployment that business managers and government officials want to avoid the most.

Induced Unemployment, the final source of unemployment, is the one that causes economic thinkers the most concern. While all of the other sources of unemployment can be painful to those suffering them, the other types of unemployment can be viewed as a natural part of the economy, brought on by weakness in the worker, individual businesses and the economy, and can be solved though effort and/or the passage of time, induced unemployment is not a natural product of the economy. There is typically little that the passage of time or the effort of a single individual worker or business can do about it.

Induced unemployment is caused by outside sources: the government, the voters, and labor unions. Induced unemployment is unemployment caused by minimum wage laws and union agreements, among other things. As labor and production costs go up, employers look for ways to cut costs, typically by cutting the hours of, and quite the number of, the workers that they employ.

From my experience as a business manager, I know firsthand that as the costs went up, the first cuts to keep costs down and profits up were from the paychecks of my employees. They didn't like it; I didn't like it; but our bosses (the business owners and higher management) would insist on cutting hours, laying off employees, and not hiring new ones.

Induced unemployment is the harshest kind of unemployment, where good intentions have gone horribly wrong; a helping hand turning into a boot in the face. Short term aid, help for the workers, unfortunately tends to become a large term burden. Small boosts for the poor result in companies not being able to afford more help; it is intervention gone bad.

Induced unemployment can also come from discrimination and the availability of cheaper labor. Not being hired, solely due to your sex, race, religion, or sexual orientation, especially in the form of customer discrimination (customers refusing to do business with a company that hires those types of people) is a form of induced unemployment. Illegal (undocumented) workers, a source of cheap labor for some companies, is another form of induced unemployment. Both of these causes of induced unemployment illustrate why a completely hands-off approach will not cure induced unemployment.

One may ask why economists are so concerned about the sources of unemployment. The answer is that economists hope that by understanding unemployment and its causes that they can create the perfect economy, or at least improve our current one. Too bad this is not comforting or helpful to those suffering from unemployment today.