What is unemployment? Causes, types, history & effects

Unemployment happens when someone is actively looking for a job but can’t find one. It’s a crucial indicator of economic health, typically measured as the ratio of unemployed individuals to the total labor force. However, it is more than just a number on a chart; it’s about real people facing tough times.

Strict definition of unemployment

According to the Bureau of Labor Statistics, unemployment is defined as individuals who do not have a job, have actively looked for work in the past four weeks, and are currently available. This definition excludes individuals who have left the workforce due to retirement, pursuing higher education, or facing disabilities.

Understanding unemployment

Unemployment isn’t just an economic term; it’s about the personal and collective struggle of individuals and families when they can’t find work. It signals how well workers can get jobs and contribute to the economy. When unemployment rates rise, it’s not just a statistic; it’s a sign that more families are struggling to make ends meet.

Sign of economic distress

Unemployed individuals still need to meet their basic consumption needs, which means that economies with high unemployment have reduced output but still face the same demand for essential goods and services. High unemployment can indicate significant economic problems and even trigger social and political turmoil, underlining the urgent need to address this issue.

Sign of an overheating economy

Conversely, a very low unemployment rate suggests that the economy is functioning close to its full potential, boosting output, driving up wages, and improving living standards. However, if unemployment drops too low, it could be a warning of an overheating economy, which is like a car engine running too hot, leading to inflationary pressures and creating challenges for businesses seeking new workers.

Main categories of Unemployment

Although straightforward in definition, economists can classify unemployment into various categories. The two main categories are voluntary and involuntary unemployment. 

Voluntary unemployment

Voluntary unemployment occurs when individuals willingly leave their jobs to seek new employment. 

Involuntary unemployment

Involuntary unemployment happens when people are laid off or fired and must find new jobs.

Types of voluntary & involuntary unemployment

Voluntary and involuntary unemployment are further divided into four types, each with unique characteristics.

1. Demand deficient unemployment

This is the most common form of unemployment during a recession. When companies face reduced demand for their products or services, they cut back on production and reduce their workforce, leading to layoffs.

2. Frictional unemployment

Frictional unemployment is typically short-term and is considered the least concerning from an economic perspective. It occurs when individuals voluntarily change jobs, taking time to find new positions. 

Recent graduates entering the job market also contribute to frictional unemployment. This type is a natural consequence of the job search process, as finding the right job match and hiring the right employees take time and resources.

3. Cyclical unemployment

Cyclical unemployment fluctuates with the economic cycle, increasing during recessions and decreasing during periods of economic growth. This type of unemployment is directly linked to the health of the economy. Efforts to reduce cyclical unemployment during economic downturns are a major focus of economic policy, using various tools to stimulate growth and mitigate the impacts of recessions.

4. Structural unemployment

Structural unemployment arises from changes in the economy that alter the demand for certain types of labor. Technological advancements can render specific skills obsolete, leading to unemployment among workers who can no longer find jobs in their previous fields.

Examples include the shift from horse-drawn carriages to automobiles and the automation of manufacturing processes. Retraining these workers is often challenging, costly, and time-consuming, resulting in extended periods of unemployment or permanent exit from the labor force.

5. Institutional unemployment

Institutional unemployment is caused by long-term or permanent factors and incentives within the economy. Several elements can contribute to this type of unemployment, including:

• Government policies like high minimum wage laws, generous social benefit programs, and restrictive occupational licensing requirements
• Labor market phenomena such as efficiency wages and discriminatory hiring practices
• High rates of unionization and other labor market institutions

These institutional factors can create barriers to employment, leading to sustained unemployment levels in the economy.

Long-term unemployment vs. Short-term unemployment

Long-term unemployment refers to joblessness lasting more than 27 weeks, even if the individual has been actively seeking work in the last four weeks. Its effects are more severe than those of short-term unemployment:

• Financial decline

56% of the long-term unemployed report a significant decrease in their net worth.

• Strained relationships

46% of long-term unemployed individuals experience strained family relationships, compared to 39% among those unemployed for shorter periods.

• Career goals

43% report significant impacts on their ability to achieve career goals.

• Self-esteem

38% lose self-respect, and 24% seek professional help.

Important causes of unemployment

Unemployment arises from factors on both the demand side (employers) and the supply side (workers).

• Demand-side causes

These include high interest rates, global recessions, and financial crises, which can reduce the need for workers.

• Supply-side causes

Frictional and structural unemployment play significant roles, such as workers voluntarily changing jobs or being displaced by technological changes.

• Economic downturns

Recessions and depressions reduce demand for goods and services, leading to job cuts.

• Technological advancements

Automation and new technologies can make certain jobs obsolete.

• Globalization and outsourcing

Jobs may move to countries where labor is cheaper.

• Voluntary job changes

Individuals may leave jobs to seek better opportunities or due to dissatisfaction.

• Policy changes

Government regulations and policies can impact employment levels, such as changes in minimum wage laws or labor regulations.

How to measure unemployment

There are different ways to measure unemployment, each with its own definition of who counts as unemployed. Unemployment is generally measured through surveys, census counts, and unemployment insurance claims. The main method involves regular surveys that collect data on the employment status of individuals.

In the United States, the Bureau of Labor Statistics (BLS) uses the U-3 rate as the official measure, which looks at the total unemployed as a percentage of the civilian labor force. However, this doesn’t include discouraged workers who’ve stopped looking for work. Other measures consider those working part-time but wanting full-time jobs.

In Europe, particularly in Scandinavian countries like Sweden, Denmark, and Norway, unemployment measurement also relies on surveys. However, these countries place additional emphasis on welfare and social security data, reflecting their robust social safety nets and active labor market policies. 

History of unemployment

Globally, unemployment has varied significantly over the years due to economic, social, and political changes. During the Great Depression of the 1930s, unemployment rates soared worldwide, with the U.S. peaking at 24.9% in 1933. Europe also experienced high unemployment, particularly in Germany and the UK.

Post-World War II saw significant economic recovery and low unemployment in many Western countries due to reconstruction efforts and industrial growth. However, the 1970s brought economic turmoil with oil crises and stagflation, leading to higher unemployment rates globally.

In the 1980s and 1990s, many countries faced structural unemployment due to technological advancements and shifts in manufacturing. The 2008 global financial crisis caused a sharp rise in unemployment, notably in the U.S. and Europe, with countries like Spain experiencing rates above 20%.

The COVID-19 pandemic in 2020 led to shocking global unemployment rates due to lockdowns and economic slowdowns. However, recovery efforts and economic stimulus measures have helped many economies bounce back, although challenges remain with job automation and changing labor markets.

Effects of unemployment

Unemployment impacts both individuals and the broader economy, creating a ripple effect.

Individual impact

Workers face financial difficulties that affect their families, relationships, and communities. Reduced consumer spending, a key economic growth driver, can lead to recessions or depressions if unchecked.

Economic impact

Lower demand and consumption result in decreased business profits, leading to further budget cuts and layoffs. This creates a cycle that is hard to break without intervention.

Recent trends in unemployment

Unemployment trends are changing with the rise of the gig economy, remote work, and the increasing impact of automation and AI on jobs. These factors are reshaping the labor market, creating new opportunities but also new challenges.

FAQs

How do you explain unemployment?

Unemployment is when people who are capable of working and want to work can’t find a job. Imagine you’re ready to work, sending out applications, attending interviews, but you’re still not hired. 

What is an example of unemployment?

An example of unemployment is a factory worker who loses their job because the factory moves its operations to another country. Despite actively searching for a new job, they remain unemployed for several months due to a lack of similar job opportunities in their area.

Unemployment meaning in economics

In economics, unemployment refers to the situation where people who are willing and able to work cannot find jobs. It’s a key indicator of economic health. When unemployment is high, it suggests the economy is not creating enough jobs, which can lead to slower economic growth.

What are the disadvantages of unemployment?

Unemployment has several disadvantages. For individuals, it means financial stress, difficulty paying bills, and potentially strained relationships. For the economy, high unemployment means lower consumer spending as well as low economic growth.

Is unemployment a problem in the world?

Yes, unemployment is a significant problem globally. Different regions face various challenges, from economic downturns and political instability to technological changes and globalization. While some countries have strong social safety nets to help the unemployed, others struggle to provide adequate support, leading to widespread hardship and social issues.