Unemployment: Overview, Causes, Types

By Kristi Waterworth – Updated Nov 3, 2025 at 8:20 PM EST | Fact-checked by Frank Bass

Key Points

Unemployment is defined by job seeking without a role in the last four weeks.
High unemployment signals economic downturns, impacting consumer spending.
Investors should watch unemployment rates as indicators of market health.

In a world where everyone needs a job to have their basic needs met, it's important that we agree on the definition of unemployment. A solid understanding of unemployment can help guide policy and provide economic indicators, improving life for everyone. Read on to better understand unemployment and how it affects investors.

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Blank unemployment claim form — Image source: Getty Images.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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What causes unemployment?

Unemployment has a lot of different causes, on both the individual and systemic levels. For individuals, unemployment may simply result from a poor fit at a job or within a company culture that causes them to leave their position. But it can also be a lot more complicated than that.

Systemically, unemployment is often caused by economic issues like depressions and recessions, changes in technology that cause skillsets to be less in demand, jobs being outsourced to other countries, and companies simply cutting positions as a form of restructuring (which may be caused by a combination of the factors above).

What are the types of unemployment?

Although unemployment can be considered voluntary or involuntary, there's a lot more nuance under the hood. Here are the most common types of unemployment:

Frictional unemployment. Frictional unemployment occurs when people change jobs voluntarily, but leave their current job without having another lined up first. Graduates looking for their first jobs are also included in this population. It's generally short-lived and says very little about the economy as a whole.

Cyclical unemployment. Cyclical unemployment is related to the rise in unemployment during difficult financial times like recessions. Unemployment tends to rise during recessionary periods and falls when economic growth is strong.

Structural unemployment. Structural unemployment occurs when there's been a change to the structure of the economy that has either resulted in a specific skillset no longer being in demand or the jobs requiring that skillset not existing where the skilled laborers live. This can cause significant displacement of workers and create extended unemployment.

Institutional unemployment. Institutional unemployment is caused by changes in institutional factors, such as a significant rise in minimum wage or restrictive licensing laws that make it more difficult for employers to afford to hire more workers. Other factors, like discriminatory hiring, can also play a part.

Unemployment: Overview, Causes, Types

Key Points

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What Is a Good Return on Investment?

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What is unemployment?

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