Types of unemployment
Not all unemployment is the same. Its causes determine which policies can help.
Frictional unemployment
Frictional unemployment occurs while people search for jobs that match their skills: new graduates, people moving cities, or workers who quit to find something better. Some is healthy, because good matches raise productivity. Job-matching websites and better information can reduce it.
Structural unemployment
Structural unemployment arises from a mismatch between workers' skills or locations and the jobs available, often after technological change or shifts in demand. Coal miners whose mines close may lack skills for available jobs in technology or healthcare. It can last a long time and needs retraining or relocation to fix.
Cyclical unemployment
Cyclical unemployment rises in recessions when aggregate demand falls and firms cut jobs, and falls in expansions. In the Great Recession, US unemployment rose from under 5% in 2007 to 10% in October 2009. In the COVID-19 shock, it jumped to 14.7% in April 2020 before falling rapidly.
Seasonal unemployment
Seasonal unemployment follows predictable patterns: ski instructors in summer, farm workers between harvests, retail staff after the holiday season. Statistical agencies publish seasonally adjusted figures to remove these regular swings and reveal underlying trends.
The natural rate of unemployment
The natural rate is the unemployment rate when the economy is at full employment, with only frictional and structural unemployment. It is not zero. Estimates for the US have typically been around 4-5%, but the natural rate is not directly observable and may change over time.
Why wages may not fall
In simple markets, unemployment would push wages down until everyone who wanted a job found one. In practice, wages are 'sticky': minimum wages, union contracts, and efficiency wages (paying above market rates to reduce turnover and boost effort) keep them above the level that would clear the market, sustaining some unemployment.
Policies for each type
Frictional unemployment can be reduced with better job information. Structural unemployment calls for education, retraining, and help with relocation. Cyclical unemployment is addressed with fiscal and monetary policy to boost aggregate demand. Using demand stimulus for structural unemployment mostly creates inflation.
Worked example
After a factory automates, 500 assembly workers lose their jobs while local hospitals cannot fill nursing posts. This is structural unemployment: jobs exist, but skills do not match. A subsidised nursing training programme addresses the cause; general stimulus would not.
Key takeaways
Frictional unemployment is job search; structural unemployment is skill or location mismatch; cyclical unemployment comes from recessions; seasonal unemployment follows regular patterns. The natural rate includes frictional and structural unemployment and is above zero. Sticky wages help explain persistent unemployment. Each type needs a different policy response.
Flashcard
Searching between jobs
Check your understanding
A software engineer quits to move to another city and spends two months finding a new job. This is: