Study notes

Unemployment - Causes of Unemployment

What are the Main Types and Causes of Unemployment?

Structural Unemployment

Structural unemployment happens when there is a long-term decline in demand in an industry leading to fewer jobs as demand for labour falls away.

Examples might include:

  • Jobs on a production line being replaced by robots e.g. motor manufacturing, online banking and online retailing
  • Unemployment caused by foreign competition (or changes in comparative advantage)

Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities. This problem is due to occupational and geographical immobility of labour and requires investment to improve skills, give the unemployed suitable and effective training and work experience and make them able to move location if needed to take a new job.

  • Globalisation leads to changes in the patterns of trade between countries. Britain has probably now lost forever a cost advantage in manufacturing goods such as motor cars, household goods and audio-visual goods, UK manufacturing industry has lost jobs as some production has shifted to lower-cost centres in Eastern Europe and countries 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 rates where job opportunities are scarce.

Cyclical Unemployment:

  • Cyclical unemployment is involuntary unemployment due to a lack of demand for goods and services. This is also known as Keynesian unemployment or demand-deficient unemployment
  • When there is a recession or a steep slowdown in growth, we see a rising unemployment because of plant closures, business failures and an increase in worker lay-offs and redundancies. This is due to a fall in demand leading to a contraction in output across many industries.
  • Firms are likely to reduce employment to cut costs and/or maintain profits – this is called “labour shedding" or “down-sizing"
  • The economy does not have to go into recession for cyclical unemployment to start rising. Many jobs can be lost even in a slowdown phase and one reason for this is because of rising productivity. Say for example that a country's GDP is expanding at 1 per cent a year but output per worker is growing by 3 per cent. This means that the same national output can be produced using fewer workers.
  • Cyclical unemployment has been a major problem for a number of European Union economies who have suffered from a deep and persistent recession in recent years. For example in 2012, Spanish unemployment rose above 6 million for the first time, with 27% of the workforce unemployed.

Cyclical unemployment is most likely to occur when there is a negative output gap

Bank of England research suggests that strong growth in self-employment in the UK is due to rising workforce participation by older people and women and technological changes

Deloitte Monday Briefing (March 2015)

Technological Unemployment

The term “technological unemployment" was first coined in the 1930s by John Maynard Keynes to describe the way in which productivity-enhancing innovation displaces workers and creates periods of higher unemployment. It is linked to structural unemployment.

Some link the rise of the internet as a cause of technological unemployment for example the US business Kodak went bust in 2013 with its 140,000 employees, in part the result of the rapid expansion of Instagram, which, when it was sold to Facebook employed just 13 people. Evidence over the long term is that innovation and the emergence and uptake of new technologies creates more jobs than it destroys.

Those most at risk from the creative destruction of new technologies are those with low and out-dated skills in the labour market.

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