Disequilibrium unemployment happens when the labor market is not balanced, meaning the number of people looking for work does not match the number of available jobs.
It is usually caused by two main factors:
- Insufficient aggregate demand: When there is not enough total spending in the economy to support full employment (often called cyclical unemployment).
- Wage rigidity: When wages are kept above the level where supply meets demand, for example, due to minimum wage laws or labor unions.
This type of unemployment lasts because wages do not change fast enough to fix the imbalance. In economics, it is linked to an output gap, occurring when the actual total production of a country is lower than what it could potentially produce.