Why Does Unemployment Occur?

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Unemployment is an economic reality, and a frequent source of good or bad financial news as unemployment rates change over time. Even a healthy economy has a certain level of unemployment as workers transition between jobs and new workers enter the labor market. When unemployment grows and becomes a problem, it is difficult to address, in part because of the number of causes.

Regulation

Government regulation of business is one cause of unemployment. Labor laws require employers to pay certain wages and offer benefits such as health insurance when they employ a given number of workers. This adds to the cost of each employee and forces businesses to hire fewer workers or terminate existing workers in order to make the remaining workforce more affordable. Other regulations that don't relate to employees still add to the cost of doing business, and workforce reduction is one area where employers turn to save money.

Competition

Increased competition between businesses can cause unemployment as businesses search for ways to cut back on their costs in order to invest in expansion or attract investors. This is especially prevalent when a business must compete with international competitors, whose labor costs are lower due to less regulation or a lower cost of living where they operate. Outsourcing, which occurs when a domestic business terminates part of its current workforce and employers labor from overseas, usually at a lower wage rate, also leads directly to unemployment in the nation of origin.

Automation

Increased automation is a major historical cause of unemployment and still a cause of job loss in some industries. Automation refers to new technological processes displacing workers. When machines or computers can perform tasks more quickly and effectively, businesses stand to save a great deal of money by investing in automation and reducing their workforces. The unemployment that comes from automation is reduced by the new jobs it creates, such as system designers and machine and computer technicians.

Government Assistance

Government assistance programs that provide financial help for unemployed individuals are actually a root cause of unemployment. According to economic analysts Lawrence H. Summers and Kim Clark, a significant portion of unemployment statistics refer to individuals who register as part of the workforce just to receive benefits. These are people who would otherwise not work and may not be actively seeking jobs. However, the presence of unemployment insurance and welfare inflates unemployment statistics. These programs also provide an incentive for people not to go back to work, thereby causing long-term unemployment.

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