US & World Economies US Economy Unemployment 7 Causes of Unemployment What's Behind Each Type of Unemployment By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on September 1, 2022 Reviewed by Erika Rasure Reviewed by Erika Rasure Erika Rasure, is the Founder of Crypto Goddess, the first learning community curated for women to learn how to invest their money—and themselves—in crypto, blockchain, and the future of finance and digital assets. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator. learn about our financial review board Fact checked by Aaron Johnson Fact checked by Aaron Johnson Aaron Johnson is a researcher and qualitative data/media analyst with over five years of experience obtaining, parsing, and communicating data to various audiences. He received a Master of Science in Social Anthropology from The University of Edinburgh, one of the top-20 universities in the world, where he focused on the study of emerging media. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Frictional Unemployment Structural Unemployment What Causes Cyclical Unemployment? Demand-Deficit Unemployment Joblessness and Unemployment Frequently Asked Questions (FAQs) 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% and 5%, according to the Federal Reserve. The Bureau of Labor Statistics (BLS) defines unemployed people as those who are jobless and have actively looked for work in the past four weeks as well as those who have been temporarily laid off from a job. If they don't keep looking, the Bureau of Labor Statistics doesn't count them in the labor force. The Balance 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. Note 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 considers this the U-5 and U-6 alternative measures of labor underutilization, or known more broadly as the “real unemployment rate.” Some people say that 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% 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. Frequently Asked Questions (FAQs) Who is counted as unemployed? The BLS defines unemployed workers as those who are out of a job and currently available to work, and who have actively looked for work in the past four weeks. It also includes workers who are temporarily laid off but expecting to return to the workforce, whether they have been actively looking for a job or not. Who qualifies for unemployment benefits? In order to qualify for unemployment benefits, a person must be unemployed "through no fault of their own," have worked during a specific period, have met minimum state wage requirements, and be actively seeking work. These are the minimum federal requirements, but some states have additional requirements. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Congressional Research Service. "Introduction to U.S. Economy: Unemployment," Pages 1-2. Federal Reserve Bank of St. Louis. "Noncyclical Rate of Unemployment (NROU)." Bureau of Labor Statistics. "Labor Force Characteristics: Unemployment." Bureau of Labor Statistics. "Employment and Unemployment Among Youth Summary." Council on Foreign Relations. "NAFTA and the USMCA: Weighing the Impact of North American Trade." United States International Trade Commission. "The Size & Composition of U.S. Manufacturing Offshoring in China," Pages 1-2. Bureau of Labor Statistics. "Mass Layoff Data Indicate Outsourcing and Offshoring Work," Page 5. National Bureau of Economic Research. "Structural/Frictional and Demand-Deficient Unemployment in Local Labor Markets," Pages 1-2. Congressional Research Service. "The Increase in Unemployment Since 2007: Is It Cyclical or Structural?" Page 2. Congressional Budget Office. "How Increasing the Federal Minimum Wage Could Affect Employment and Family Income." Bureau of Labor Statistics. "Table A-15. Alternative Measures of Labor Underutilization." Library of Congress. "H.R.1876 - Real Unemployment Calculation Act." Gallup. "The Big Lie: 5.6% Unemployment." Bureau of Labor Statistics. "How the Government Measures Unemployment." Benefits.gov. "Unemployment Insurance."