Chapter 6.3: Categories of Unemployment
6.3 Categories of Unemployment
Learning Objectives
By the end of this section, you will be able to:
- Explain frictional, structural and cyclical unemployment
- Assess relationships between the natural rate of employment and potential real GDP, productivity, and public policy
Categories of Unemployment
Frictional Unemployment –refers to the temporary period of unemployment that occurs when individuals are in the process of transitioning between jobs or entering the labor market. It is a natural and unavoidable type of unemployment that arises due to factors such as job search, relocation, or changes in personal circumstances. Workers may take some time to find a job that matches their skills and preferences, leading to brief periods of unemployment during this transition. Frictional unemployment is considered a normal part of a dynamic and evolving labor market.
Structural Unemployment – refers to the portion of unemployment that is due to changes in the structure of the economy that results in a significant loss of jobs in certain industries. Structural unemployment tends to be long term. The main causes of structural unemployment include technological advancements, changes in consumer preferences, globalization, and shifts in the overall demand for goods and services. When these structural changes occur, some industries may decline, leading to a mismatch between the skills of the available workforce and the requirements of the available jobs. Workers who are structurally unemployed often find it challenging to secure new employment within their original industries, as their skills may no longer be in high demand.
Cyclical unemployment – refers to increases in unemployment that occurs during a recession and a decrease during recovery. It’s associated with a decrease in output. The word cyclical come from business cycles, which refers to period of expansion and periods of recession. Recession causes cyclical unemployment.
Natural Rate of Unemployment
The sum of frictional unemployment and structural unemployment is the natural rate of unemployment. The natural rate of unemployment represents the normal and persistent unemployment that any economy experiences. It accounts for individuals in the ongoing process of transitioning between jobs, as well as industries undergoing closures and the emergence of new sectors. The natural rate of unemployment typically falls within a range of below 5%.
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.
This chapter was written by Professor Karen David and is published under a Creative Commons Attribution 4.0 International License. The objectives and last paragraph appears in 8.4 What Causes Changes in Unemployment over by OpenStax, published under a Creative Commons Attribution 4.0 International License.
