Effects, Cause and Types of Unemployment

Effects, Cause and Types of Unemployment

Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. Unemployment is expressed as percentage of the total available work force that is unemployed, but actively seeking employment and willing to work which is known as the unemployment rate. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force. Unemployment is a key economic indicator because it signals the ability (or inability) of workers to readily obtain gainful work to contribute to the productive output of the economy. More unemployed workers mean less total economic production will take place than might have otherwise. And unlike idle capital, unemployed workers still need to maintain at least subsistence consumption during their period of unemployment. This means an economy with high unemployment has lower output without a proportional decline in the need for basic consumption. High, persistent unemployment can signal serious distress in an economy and even lead to social and political upheaval.

Causes of Unemployment

There are four main causes of unemployment namely; Technological Change, Lack of skills and education, Increase in Population and Rising Cost.


Technological Change:  There is a global rapid technological change which plays a big role in the increased unemployment problem. Many jobs which were handled by hands are being done by different machines and technology nowadays. The new advanced technology replaced the low skilled or unskilled workers in different factories. This made production faster and more accurate, but it resulted in more unemployed people. For example; when personal computers replaced typewriters, typewriter become unemployed and had to find other industries to be employed in.

Increase in Population:  The increased population which leads to higher unemployment rates. As the number of people who are looking for jobs is increasing, it is more difficult to arrange jobs for all these huge numbers of workers. In this situation the demand for work will be more than the available occupations. This will result in increased number of unemployed individuals. An unemployment situation continues as long as the demand-supply gap persists. This is very obvious in countries like China and India.

Lack of Skills and Education: This happens when the qualifications of a person are not sufficient to meet his job responsibilities. If the education was not directed towards the labor market then a mismatch occurs thus leading to structural unemployment. These individuals face difficulties in learning new skills applicable for the required job for example, computer skills, management and communication. As the need for skilled and educated workers increase for employers, the employment opportunities for those without a college education decrease leading to higher unemployment rate.

Rising Cost:  Unemployment can be due to the rising cost. The rising cost makes it hard for the companies to pay the usual optimum salary for the employees or even the minimum wage in some cases. Hence, the employees reject low wage jobs and leave the companies. For instant, if the price of petrol or electricity has increased this definitely will affect the industries or factories which depend on these energy sources. Moreover, sometimes companies need to cut down the budget due to an economic crisis, industrial decline, company bankruptcy, or organizational restructuring, so the number of employees is reduced or some positions are cancelled which increases the unemployment rates.

Types of Unemployment

Basically there are six types of unemployment:

1.   Frictional unemployment

2.   Cyclical unemployment

3.   Demand deficient unemployment

4.   Structural unemployment

5.   Voluntary unemployment

6.   Seasonal unemployment.

Frictional Unemployment: This refers to those workers who are in between jobs. An example is a worker who recently quit or was fired and is looking for a job in an economy that is not experiencing a recession. It is not an unhealthy thing because it is usually caused by workers trying to find a job that is most suitable to their skills.

Cyclical Unemployment: Cyclical unemployment is caused by declining demand: when there is not enough demand in an economy for goods and services, businesses cannot offer jobs. According to Keynesian economics, cyclical unemployment is a natural result of the business cycle in times of recession: if all consumers become fearful at once, consumers will attempt to increase their savings at the same time, which means there will be a decrease in spending, and businesses will not be able to employ all employable workers.

Demand Deficient Unemployment: Demand deficit unemployment is the biggest cause of unemployment that typically happens during a recession. When companies experience a reduction in the demand for their products or services, they respond by cutting back on their production, making it necessary to reduce their workforce within the organization. In effect, workers are laid off

Structural Unemployment: Happens when the skills set of a worker does not match the skills demanded by the jobs available, or alternatively when workers are available but are unable to reach the geographical location of the jobs. An example is a teaching job that requires relocation to China, but the worker cannot secure a work visa due to certain visa restrictions. It can also happen when there is a technological change in the organization, such as workflow automation that displaces the need for human labor.

Voluntary Unemployment: Voluntary unemployment happens when a worker decides to leave a job because it is no longer financially compelling. An example is a worker whose take-home pay is less than his or her cost of living.

Seasonal Unemployment: Seasonal unemployment is caused by different industries or parts of the labor market being available during different seasons. For instance, unemployment goes up in the winter months, because many agricultural jobs end once crops are harvested in the fall, and those workers are left to find new jobs.

Effect of Unemployment

There are four major effects of unemployment.

Financial Problems:  The financial problems which are rising from prolonged unemployment. It is known that we cannot buy anything without money; the constant income buys food, clothing and shelter. Due to the loss of income, unemployed individuals will be unable to earn money to meet financial obligations. For example, people who fail to pay mortgage payments or to pay rent will lose their housing properties and become homeless. Unemployment also prevents one from doing many things and involving in different activities for example, travelling. Consequently, this affects the national economy leads to poverty. As a result of the financial crisis and the reduced overall purchasing capacity of a country the unemployed individuals are unable to maintain the minimum standard of living.

Psychological Problems: Unemployment affects a person psychologically too. Numerous studies have revealed a relationship between unemployment and lack of self- esteem and confidence leading to depression. Besides, there is an increased anxiety and stress levels which lead to psychosomatic diseases, personal worthlessness and powerlessness. In a study on the “Influence of the Social Environment on Psychology” conducted in 1979 by Dr. M. Brenner it was found that every 10% increase in the number of people unemployed on average causes an increase of 1.2% in total mortality, a 1.7% increase in cardiovascular disease, 1.3% more cirrhosis cases, 1.7% more suicides, 4.0% more arrests, and 0.8% more assaults reported to the police. Furthermore, it has shown that long period of unemployment can also reduce the life expectancy of workers by about 7 years (Alain Anderson, Economics. Fourth Edition 2006).

Social Problems: There are many obvious and well-documented social problems which are caused by unemployment. Because of the increased spare time and stress there will be an increase in the rates of alcoholism, drug abuse and domestic violence. Moreover, high unemployment often results in increased marriage breakdown, divisions and discrimination in society, suicide rates and crime rates especially among the young

Unemployment also has been connected to the impaired family functioning as it affects the parents’ interactions with their children and their spouse as well. Unemployed parents spend more time with their children, but the quality of these interactions suffers in comparison with those of employed parents. (Liker and Elder 1983; Barling 1990) On the other hand, it is not clear how the unemployment play a role in these adverse events and what is the significance of other related factors.

Effects of Unemployment on the Economy: Some of the effects of unemployment are immediate and obvious. When unemployment increases, both state and federal governments pay increased unemployment benefits. These are not inconsiderable. Even in February of 2017 —with the unemployment rate hovering around 5 percent —unemployment benefits that include food benefits and Medicaid totaled $2.96 billion for the month. Even more significant in the U.S. consumer economy are the chained consequences of these increased benefits, which require the government either to borrow money to pay these benefits, and by doing so, also deferring the costs into the future or reducing spending in other areas. This is a compensatory strategy, but it can make a bad economic situation worse. An historic 1967 paper on the relationship between unemployment and economic output by Yale economist Arthur Okun, concluded that even a 1 percent increase in unemployment reduced the U.S. GDP (Gross Domestic Product) by 2 percent, which has a multiplier effect of more than 100 percent. A 2017 paper issued by the St. Louis Fed on Okun's law — as it has come to be known — noted that this ratio "holds true 50 years later."

In conclusion, Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. Unemployment is expressed as percentage of the total available work force that is unemployed, but actively seeking employment and willing to work which is known as the unemployment rate.

There are different causes of unemployment around the world. The top causes are Technological Change, Lack of skills and education, Increase in Population and Rising Cost. Frictional unemployment, cyclical unemployment, demand deficient unemployment, structural unemployment, voluntary unemployment and seasonal unemployment, but it varies from countries to countries.


The various effects of unemployment include financial, social and psychological problems. Unemployment has become a major problem which affects our life, health, economy and community. So countries should build more companies and factories in order to provide more opportunities and positions to respond to the need of the increased population. Moreover, there should be unemployment insurance to help unemployed individuals in their financial problems till they find a job. It is important also to utilize the vocational education along with other skills courses’ in order to prompt the education and skills of the workers to meet the labor market need.

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