Types of Unemployment

Types of Unemployment

Use this website for current unemployment data: https://www.bls.gov/

Frictional Unemployment

In a market economy, some companies are always going broke for a variety of reasons: old technology; poor management; good management that happened to make bad decisions; shifts in tastes of consumers so that less of the firm’s product is desired; a large customer who went broke; or tough domestic or foreign competitors.

Conversely, other companies will be doing very well for just the opposite reasons and looking to hire more employees. In a perfect world, all of those who lost jobs would immediately find new ones. However, in the real world, even if the number of job seekers is equal to the number of job vacancies, it takes time to find out about new jobs, to interview and figure out if the new job is a good match, or perhaps to sell a house and buy another in proximity to a new job.

Economists call the unemployment that occurs in the meantime, as workers move between jobs, frictional unemployment. Frictional unemployment is not inherently a bad thing. It takes time on part of both the employer and the individual to match those looking for employment with the correct job openings. For individuals and companies to be successful and productive, you want people to find the job for which they are best suited, not just the first job offered.

In the mid-2000s, before the 2008–2009 recession, it was true that about 7percent of U.S. workers saw their jobs disappear in any three-month period. However, in periods of economic growth, these destroyed jobs are counterbalanced for the economy as a whole by a larger number of jobs created. In 2019, for example, there were typically about 6 million unemployed people at any given time in the U.S. economy. Even though about two-thirds of those unemployed people found a job in 14 weeks or fewer, the unemployment rate did not change much during the year, because those who found new jobs were largely offset by others who lost jobs.

The adjustment process happens in ripples. Some people find new jobs near their old ones, while others find that they must move to new locations. Some people can do a very similar job with a different company, while others must start new career paths. Some people may be near retirement and decide to look only for part-time work, while others want an employer that offers a long-term career path. The frictional unemployment that results from people moving between jobs in a dynamic economy may account for one to two percentage points of total unemployment.

The level of frictional unemployment will depend on how easy it is for workers to learn about alternative jobs, which may reflect the ease of communications about job prospects in the economy. The extent of frictional unemployment will also depend to some extent on how willing people are to move to new areas to find jobs—which in turn may depend on history and culture.

 At any given time, about 2 or 3 percent of the labor force is frictionally unemployed. Students who are looking for their first full-time jobs, Homemakers reentering the labor market after 5 or 10 years, and servicemen and women who have recently been discharged by the armed forces are frictionally unemployed until they find jobs. In addition, those who leave their jobs voluntarily, perhaps so they can spend all their time looking for better jobs or maybe they’re looking in another part of the country. Add to these the people who get fired or quit – these people, too, are between jobs, or frictionally unemployed.

When people change jobs, they may have time between jobs, or they may leave one job on a Friday afternoon and start a new one on the following Monday morning. Officials at the labor department estimate that 40% of the labor force, or roughly 60 million workers, change jobs within a year. Most had left a job recently, by choice or not, but successfully found a new one in the same industry.

Structural Unemployment

The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills. An example of the former would be the unemployment among aerospace engineers after the U.S. space program downsized in the 1970s. An example of the latter would be high school dropouts. Add to these the people whose companies have gone out of business or whose jobs have been exported to low-wage countries and you’ve got another 2 to 3% of the labor force that is structurally unemployed.

Some people worry that technology causes structural unemployment. In the past, new technologies have put lower skilled employees out of work, but at the same time they create demand for higher skilled workers to use the new technologies. Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become structurally unemployed. For people with no skills and little education, that option is more limited.

In addition, one out of five Americans is functioning illiterate. These people cannot write, read, or do simple numerical computations. In a workplace that increasingly demands these minimal skills, more and more of these people are finding themselves virtually shut out of the labor force. Each year our educational system turns out 1 million more functional illiterates, most of whom will face long periods of structural unemployment. Many of these young adults come from very poor families where no one has held a job. They have no past history or relatives that know how to dress for a job interview, what to say, or even the need to show up on time. unless these people are given vocational training and provided with entry-level jobs, they will be out of work for most of their lives. Many are from populations that have been marginalized and have not ever had the opportunity to participate in the mainstream economy.

 What if someone were in between jobs for 6 months, or even a year, or even two years? when someone has been out of work for a long period of time he or she is classified as structurally unemployed. where do we draw the line between frictional instructional unemployment? the answer is we don’t. there is no clear dividing line.

Cyclical Unemployment

Our economy certainly has its ups and downs, a set of fluctuations known as the business cycle. During a recession, the unemployment rate sometimes rises to 8, 9, or even double digits.  During the Great Depression, the official unemployment rate hit 25 percent, which definitely understated the true unemployment picture.

If we allow for a certain amount of frictional instructional unemployment, anything above the sum of these two would be cyclical unemployment. Let’s say that the sum of frictional instructional unemployment is 5%. If the actual rate of unemployment is 7.7%, then the cyclical rate is 2.7%.

 If we take a 5% unemployment rate as our working definition of full employment, anything above 5% would be cyclical unemployment. you may Wonder whether 5% is a reasonable level for full employment. We can never expect our unemployment rate to reach zero, since we will always have some frictional and structurally unemployed people.

What About Seasonal Unemployment

At any given time, a couple hundred thousand people may be out of work because this is their slow season. Seasonal unemployment is not nearly as large as frictional common structural, or cyclical unemployment, so it is not figured into our discussion of total unemployment.

Natural Unemployment Rate

The natural rate of unemployment is not “natural” in the sense that water freezes at 32 degrees Fahrenheit or boils at 212 degrees Fahrenheit. It is not a physical and unchanging law of nature. Instead, it is only the “natural” rate because it is the unemployment rate that would result from the combination of economic, social, and political factors that exist at a time—assuming the economy was neither booming nor in recession. These forces include the usual pattern of companies expanding and contracting their workforces in a dynamic economy, social and economic forces that affect the labor market, or public policies that affect either the eagerness of people to work or the willingness of businesses to hire. Let’s discuss these factors in more detail.

The natural unemployment rate is the unemployment rate—around 5 or 6 percent—below which inflationary pressures build up. As unemployment falls, it becomes increasingly difficult to find employees, employers will bid up wages, possibly pushing up the rate of inflation. Once the unemployment rate falls below its natural rate, which most economists estimate to be 5 or 6%, then inflationary wage pressure emerges. As unemployment goes down, businesses start to find it hard to hire workers. If this goes on long enough, they will start to increase hiring wages.  And in turn, the higher paid newly hired workers may start to compete to buy more goods and services with this new money and push goods and services prices upward… It becomes a delicate balance.

Natural Unemployment and Potential Real GDP

The natural unemployment rate is related to two other important concepts: full employment and potential real GDP. Economists consider the economy to be at full employment when the actual unemployment rate is equal to the natural unemployment rate. When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy is above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to all workers working overtime.

Public Policy and the Natural Rate of Unemployment

Public policy can also have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of unemployment is lower and that worker will be less eager to seek a new job.

What seems to matter most is not just the amount of these benefits, but how long they last. A society that provides generous help for the unemployed that cuts off after, say, six months, may provide less of an incentive for unemployment than a society that provides less generous help that lasts for several years. Conversely, government assistance for job search or retraining can in some cases encourage people back to work sooner. See the Clear It Up to learn how the U.S. handles unemployment insurance.

The Natural Rate of Unemployment in Recent Years

The underlying economic, social, and political factors that determine the natural rate of unemployment can change over time, which means that the natural rate of unemployment can change over time, too.

Estimates by economists of the natural rate of unemployment in the U.S. economy in the early 2000s run at about 4.5 to 5.5%. This is a lower estimate than earlier. We outline three of the common reasons that economists propose for this change below.

The internet has provided a remarkable new tool through which job seekers can find out about jobs at different companies and can make contact with relative ease. An internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, and requesting a list of jobs and application forms. Social networking sites such as LinkedIn have changed how people find work as well.

The growth of the temporary worker industry has probably helped to reduce the natural rate of unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies. By the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping-stone to a permanent job that they might not have heard about or obtained any other way, so the growth of temp jobs will also tend to reduce frictional unemployment.

The aging of the “baby boom generation”—the especially large generation of Americans born between 1946 and 1964—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today. As we noted earlier, middle-aged and older workers are far more likely to experience low unemployment than younger workers, a factor that tends to reduce the natural rate of unemployment as the baby boomers age.

The combined result of these factors is that the natural rate of unemployment was on average lower in the 1990s and the early 2000s than in the 1980s. The 2008–2009 Great Recession pushed monthly unemployment rates up to 10% in late 2009. However, even at that time, the Congressional Budget Office was forecasting that by 2015, unemployment rates would fall back to about 5%. During the first two months of 2020, the unemployment rate held steady at 3.5%. As of the first quarter of 2022, the Congressional Budget Office estimates the natural rate to be 4.6%.

A Preview of Policies to Fight Unemployment

The Government Budgets and Fiscal Policy chapters provide a detailed discussion of how to fight unemployment, when we can discuss these policies in the context of the full array of macroeconomic goals and frameworks for analysis. However, even at this preliminary stage, it is useful to preview the main issues concerning policies to fight unemployment.

The remedy for unemployment will depend on the diagnosis. Cyclical unemployment is a short-term problem, caused because the economy is in a recession. Thus, the preferred solution will be to avoid or minimize recessions. As Government Budgets and Fiscal Policy discusses, governments can enact this policy by stimulating the overall buying power in the economy, so that firms perceive that sales and profits are possible, which makes them eager to hire.

Dealing with the natural rate of unemployment is trickier. In a market-oriented economy, firms will hire and fire workers. Governments cannot control this. Furthermore, the evolving age structure of the economy’s population, or unexpected shifts in productivity are beyond a government’s control and, will affect the natural rate of unemployment for a time. However, as the example of high ongoing unemployment rates for many European countries illustrates, government policy clearly can affect the natural rate of unemployment that will persist even when GDP is growing.

When a government enacts policies that will affect workers or employers, it must examine how these policies will affect the information and incentives employees and employers have to find one another. For example, the government may have a role to play in helping some of the unemployed with job searches. Governments may need to rethink the design of their programs that offer assistance to unemployed workers and protections to employed workers so that they will not unduly discourage the supply of labor. Similarly, governments may need to reassess rules that make it difficult for businesses to begin or to expand so that they will not unduly discourage the demand for labor. The message is not that governments should repeal all laws affecting labor markets, but only that when they enact such laws, a society that cares about unemployment will need to consider the tradeoffs involved.

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