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Q&A - What are the main causes of unemployment?

Tuesday, October 27, 2009
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The causes of unemployment can be described under four main categories:
- Seasonal unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment

Seasonal unemployment

Seasonal unemployment happens due to regular and predictable seasonal changes in employment / labour demand.  Seasonal unemployment affects certain industries more than others.  For example it is a common feature of employment in these industries:

• Catering and leisure
• Construction
• Retailing
• Tourism
• Agriculture

Frictional unemployment

Frictional unemployment is transitional unemployment due to people moving between jobs:  For example, redundant workers or people joining the labour market for the first time such as university graduates may take time searching to find the work they want at an acceptable wage or salary.

Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available jobs. Incentives problems can also cause some frictional unemployment as some people looking for a new job may stay out of work if they believe the tax and benefit system will reduce the net increase in income from taking work. When this happens there are disincentives for the unemployed to accept work – this is known as the unemployment trap.

Structural unemployment

Structural unemployment occurs when there is a long run decline in demand in an industry leading to a reduction in employment because of international competition. Globalisation is a fact of life and inevitably it leads to changes in the patterns of trade between countries from year to year.

For example, the UK has probably now lost forever, its cost advantage in manufacturing goods such as motor cars, household goods and audio-visual equipment, indeed our manufacturing industry has lost over 500,000 jobs in the last five years alone as production has shifted to lower-cost centres in Eastern Europe and emerging markets in Far East Asia. Many of these workers may suffer from a period of structural unemployment, particularly if they are in regions of above-average unemployment where job opportunities are scarce.

You can see the effect of structural unemployment on the UK’s manufacturing sector in the chart further below.

Structural unemployment exists where there is a mismatch between the skills of the workforce and the requirements of the new job opportunities. Many of the unemployed from manufacturing industry (e.g. in coal, steel and engineering) have found it difficult to find new work without an investment in re-training.

Cyclical unemployment

Cyclical unemployment is due to a lack of demand for goods and services. When there is a recession or a slowdown in economic growth, we see a rising unemployment because of factors such as:

• Plant closures and other actions to reduce production capacity
• Business failures
• Redundancies
• Outsourcing to reduce costs

This is due to a fall in demand leading to a contraction in output across many industries.

An important evaluation point to note is that the economy does not have to go into recession for cyclical unemployment to start rising. Many jobs can be lost even in a mild slowdown phase and one reason for this is because of rising productivity.

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