What causes unemployment?

Economists have at least five different ways to think about unemployment.

Cyclical unemployment is the idea that unemployment follows the overall boom and bust cycle of economies. During recessions, unemployment rises, but once the economy picks up again, it declines. Obviously there’s a bit of chicken and egg at play here; the more people work, the more businesses grow, the more jobs there are, and vice versa.¹

Frictional unemployment is basically the idea that in between the times when workers are looking for jobs, and when they find them, there’s a short period of unemployment that isn’t actually much of a problem.² As it takes time and resources for workers to find new jobs and for employees to find new workers, people do not move between jobs instantly. So basically there will always be some people who are unemployed. Economists call the rate of unemployment caused by these frictions, the natural rate of unemployment.

Structural unemployment is the idea that unemployment is caused by a mismatch between the jobs there are in the economy and the skills that workers have.³ This might be because of new technologies which change the need for certain skills in the population, policy changes like minimum wages changing how many workers businesses can afford, changes in social attitudes towards certain types of jobs. For example, fishing jobs have rapidly declined due to a mixture of depleting fish stocks, policies trying to limit fishing, and the introduction of machines that requires less labor. This has caused unemployment in many fishing villages across many developed countries.

Systemic unemployment looks at the whole economic system, and asks the question - who actually benefits from unemployment? The systemic unemployment theory argues that capitalists, or the people that own all the businesses in the economy, actually benefit from unemployment. Why? Well, it’s much easier to keep people working hard for a lower wage, if there are a lot more people looking for work who can replace them. So it is in the interests of the people who hire and fire (ie the business owners), to make sure that unemployment stays above a low level.

Political unemployment argues that unemployment is caused by artificially keeping wages too high. Through things like trade unions, minimum wages and labor regulations, wages are pushed up so that workers become too expensive for businesses and so there are more people looking for jobs than actual jobs available.

What  determines unemployment remains a controversial question in economics, partly because each theory suggests different solutions to the problem, and different ways about how people and economies really work.