Three Main Causes of Unemployment

Unemployment is the state of the economy where some people who are able and willing to work are not employed in the production of goods and services. According to the International Labour Organization, the unemployed are people who are of working age, but are without work, available to start work within two weeks, and have either actively looked for work in the last four weeks or are waiting to take up an appointment.

For the purpose of measuring unemployment, the population is usually divided into the working-age population and the non-working population. In Singapore, the working-age population refers to those that are 15 years of age and over. The labour force refers to the manpower currently available in the economy. It comprises of people who are working or seeking work.

That being said, there are three main causes of unemployment.


Demand-deficient/Cyclical Unemployment

Demand-deficient unemployment, or cyclical unemployment occurs due to a deficiency in aggregate demand especially when the economy moves into a recession. When aggregate demand falls, lesser supply of goods and services will be needed and hence production falls. Given that wages remain the same to avoid reducing the efficiency of the workers, some businesses may reduce the supply of labour to cut costs and this results in a demand-deficient unemployment.

During this period, some businesses may also freeze hiring as management adopts a wait-and-see approach towards economic uncertainty.


Minister Manpower Lim Swee Say said in a May Day message this year that Singapore’s economy is still growing. As of March 2017, Singapore’s overall unemployment rate is 2.3 per cent and it is the highest job rate in over 7 years since the December quarter 2009. Despite this, it is still predicted to rise gradually. Nonetheless, it continues to remain below previous peaks of more than 5 per cent during the Severe Acute Respiratory Syndrome (SARS) and more than 4 per cent during the 2008-09 Global Financial Crisis.

Cyclical unemployment eventually becomes structural unemployment when workers remain unemployed for a prolonged period such that they need to acquire new skills and knowledge in order to become competitive again.


Structural Unemployment

Structural unemployment occurs due to a change in the structure of the economy. There arise a mismatch between the skillsets of the workers and the relevancy of these skills required for the available jobs in the market. As technology advances, changes in comparative advantage or changes in the pattern of demand is inevitable. This may cause the structure of the economy to change as some industries expand while some contract and become obsolete.

When this happens, expanding industries tend to create jobs while contracting industries lose jobs. Workers who lose their jobs first are those who do not possess the relevant skills and knowledge that are applicable to the expanding industries which requires high skills.


Singapore for example, has previously pursued a labour-driven economy strategy to boost economy growth before pushing for a more productive-driven strategy to empower its workers with relevant skills and knowledge. However, to maintain its competitive edge, the Singapore economy is increasingly moving towards higher value-added, niche sectors – such as medical technology and data analytics. While these provide good jobs, many professionals, managers, executives and technicians (PMETs) do not have the relevant skills needed.

It really all depends on how quickly Singapore restructures its industries to remain competitive and how abled are its workers to attain higher skills in such a fast-paced environment . Like what the National Trade Union Congress (NTUC)’s President Mary Liew and Secretary-General Chan Chun Sing said, “To stay ahead, our working people must continually deep-skill, reskill, and upskill – to continuously evolve to stay relevant to anticipate our economy’s needs and working people’s aspirations.”


Frictional Unemployment

Frictional Unemployment occurs due to a lack of perfect information on the job market. Firms that are looking to hire are not fully aware of the type of labour available to them, and workers are not fully informed on the types of jobs available. Both parties need time to explore the job market due to imperfect information and this leads to frictional unemployment.

Frictional unemployment is natural and acceptable to any healthy economy. Of course, to reduce it, job market intermediaries have been set up to match firms and workers that are searching for one another. In addition, career fairs have been organized yearly in Singapore for jobseekers and education-minded people to meet its potential employers and training organizations.


Full employment exist when there is no demand-deficient unemployment. Even then, there still exists unemployment which comprises of structural unemployment and frictional unemployment. As a result, full employment is also called low unemployment which is what all governments would try to achieve for its economy.

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