The causes and consequences of unemployment.

Considering the unpredictable nature of the economy, unemployment is something we may have to face at any point of time in our careers. The inflating world population, its mismatch with the number and kind of work opportunities available, and a decrease in the size of the educated class results in an economic imbalance, which is an important cause of unemployment. The closing down of businesses, or their reduced needs of manpower are among the other reasons. Apart from adding to the economic imbalance, unemployment leads to stress and dissatisfaction in the jobless and their families. Circumstances force people to remain unproductive, in spite of their capability to work. This has adverse effects on society. In the following sections of this Buzzle article, we will look at the causes and consequences of unemployment.


◆ According to the Keynesian economic theory, unemployment results from insufficient effective demand for goods and services in an economy. If the demand for a particular good or service falls, companies produce less. This causes a decrease in the demand for workforce, leading to unemployment. In this case, a company may reduce its employees or file for bankruptcy. This is known as demand deficient unemployment.

◆ When businesses experience a growth in demand for their products, they need workforce. This brings in a period of increased employment. When businesses experience a decline in demand, their need for workers reduces. This leads to cyclical unemployment.

◆ Some believe that structural problems and inefficiencies in the labor market cause unemployment. Not being able to learn the skills or technology required for a job role or being unable to move to a different job location can lead to structural unemployment.

◆ Also, regulations like minimum wage laws imposed on the labor market lead to unemployment.

◆ When the law of demand and supply is not applied in case of employing people, unemployment results. A decline in the demand for products or services of a company does not reflect in the wages of its employees. This may strike an imbalance in the economy.

◆ When a person moves from one city or country to another, it may take him some time to find a new job. If he quits his job for a personal reason or because it does not suit his skills, he has to remain unemployed till he finds a new one. This is known as frictional unemployment.

◆ A temporary period of unemployment may be caused by a seasonal production of certain goods. For example, agricultural and mining activities may not be carried out throughout the year, which means, those working in these sectors will be unemployed seasonally.

◆ People may choose to remain unemployed for various reasons. Ideally, those who are not looking for work are not considered as ‘unemployed’. Only those looking for a job but not being able to acquire one, can be classified as unemployed.

◆ Those who are of the working age but have stopped looking for work due to reasons like reduced motivation, are not counted in the unemployment statistics. This can be regarded as hidden or covered unemployment. It means the number of unemployed is always more than what is shown in the statistics.

◆ During a period of recession, some companies may lay off employees and others may reduce or completely stop recruiting people, leading to unemployment.

◆ Businesses may have other reasons for reducing employees, such as the shutting down of a particular division or new technology reducing the amount of workforce needed.

◆ If a company can obtain cheap labor from another country, it results in unemployment for the natives. For example, Chinese and Indian people are taking up jobs in the US. Companies are benefiting from having to pay relatively lesser salaries to workers from these countries. But this can affect the employment opportunities that Americans have.

◆ An increase in the taxes imposed on companies in certain countries, may lead the businesses to move out of that country. This may lead to job cuts of people employed by these companies.