Involuntary unemployment occurs when a person is unemployed despite being willing to work at the prevailing wage. It is distinguished from voluntary unemployment, where a person chooses not to work because their reservation wage is higher than the prevailing wage. In an economy with involuntary unemployment, there is a surplus of labor at the current real wage. This occurs when some force prevents the real wage rate from decreasing to the real wage rate that would equilibrate supply and demand (such as a minimum wage above the market-clearing wage).^{[citation needed]} Structural unemployment is also involuntary.

Economists have several theories explaining the possibility of involuntary unemployment, including implicit contract theory, disequilibrium theory, staggered wage setting, and efficiency wages.

The officially measured unemployment rate is the ratio of involuntary unemployment to the sum of involuntary unemployment and employment (the denominator of this ratio being the total labor force).

Models based on implicit contract theory, like that of Costas Azariadis, are based on the hypothesis that labor contracts make it difficult for employers to cut wages. Employers often resort to layoffs rather than implement wage reductions. Azariadis argued that, given risk-averse workers and risk-neutral employers, contracts with the possibility of layoffs would be optimal.

In Keynesian theory, involuntary unemployment is associated with insufficient aggregate demand and is therefore closely related to demand-deficient unemployment.

Efficiency wage models suggest that employers pay their workers above market-clearing wages to enhance their productivity. In efficiency wage models based on shirking, employers are worried that workers may shirk, knowing that they can move to another job if they are caught. Employers make shirking costly by paying workers more than they would elsewhere, thereby incentivising them to avoid shirking. When all firms behave this way, an equilibrium is reached where unemployed workers are willing to work at prevailing wages.

Following earlier disequilibrium research, including that of Robert Barro and Herschel Grossman, work by Edmond Malinvaud made a distinction between classical unemployment, where real wages are too high for markets to clear, and Keynesian unemployment, involuntary unemployment due to inadequate aggregate demand. In Malinvaud's model, classical unemployment is remedied by cutting the real wage, while Keynesian unemployment requires an exogenous stimulus in demand. Unlike implicit contrary theory and efficiency wages, this line of research does not rely on a higher than market-clearing wage level. This type of involuntary unemployment aligns with Keynes' definition, whereas efficiency wages and implicit contract theory do not align well with Keynes' focus on demand deficiency.

For many economists, involuntary unemployment is a real-world phenomenon of central importance to economics. Many economic theories have been motivated by the desire to understand and control involuntary unemployment.