The Four Types of Unemployment
Four commonly distinguished forms of unemployment are:
1. Frictional unemployment.
Frictionally unemployed people are in between jobs or are students who just completed school and are looking for a job. This form of unemployment is usually short-lived in nature.
2. Structural unemployment.
The structurally unemployed are people who are laid off and looking for work because technology advances or other structural changes in production (for example, companies moving abroad) took away their jobs. The horse-and-buggy drivers of the early 1900s lost their jobs after the automobile became popular and affordable.
Many American steel, auto, electronics, and textile workers lost their jobs and became structurally unemployed due to foreign competition and American companies locating abroad (outsourcing). This form of unemployment (especially those due to technology advances) is usually permanent in nature. Even though these specific jobs may be gone forever, people unemployed for structural reasons can frequently find work in other industries after receiving training and acquiring other skills.
3. Cyclical unemployment.
Cyclically unemployed people are laid off due to a decline in the demand for their product; they are also looking for a job. During recessions, the demand for cars and houses and other durable products decreases. Workers in these industries lose their jobs until demand increases again. This form of unemployment is usually temporary in nature.
4. Seasonal unemployment.
Seasonally unemployed people are out of work and looking for a job during the off-season. Examples include ice cream vendors during the winter, schoolteachers during the summer (they are considered unemployed only if they are looking for a job during this time), and ski-lift operators during the summer.
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Full Employment and the Natural Rate of Unemployment
Government economists define full employment, or the so-called natural rate of unemployment (also referred to as the Non-Accelerating Inflation Rate of Unemployment, or NAIRU), as a situation when all unemployment is structural and frictional. During healthy economic times, there are many jobs available, and cyclical and seasonal unemployment can reasonably be expected to be zero or close to zero percent.
Generally, frictional and structural unemployment cannot be expected to equal zero at any time. Whether in good or bad economic times, there are always some people in between jobs (frictional unemployment), and there are always technology changes and companies changing locations (structural unemployment).
The Organization for Economic Cooperation and Development (OECD) estimates that the full employment rate for the United States occurs when unemployment is between 5% and 6%. This portion of the labor force is frictionally and structurally unemployed. In actuality, this estimate varies based upon the country, the time period, and politicians’ economic beliefs.
The definition of full employment is important because governments use this rate to determine how much they should stimulate the economy and how much they should be concerned about inflation. Keynesian economists believe that if the unemployment rate falls below the natural rate of unemployment, the economy is likely to generate inflation. If the unemployment rate increases to well above the rate, the country suffers from stagnation, and Keynesians recommend for the government to stimulate the economy.
Classical Economic Beliefs about the Natural Rate of Unemployment and Inflation
Classical economists disagree with the concept of full employment and the idea that low rates of unemployment can trigger inflation. They claim that unemployment can be low without causing inflation. Classical economists believe that inflation is caused by persistent increases in the nation’s money supply and that robust economic growth rates and low rates of unemployment are unrelated to inflation.
Classical Economic Beliefs about Decreasing Structural Unemployment
Classical economists believe that most structural unemployment can be avoided. If people plan ahead and acquire new, more highly demanded skills while they still have a job, they can more quickly start a new job when they lose their current one. A teacher may lose her/his job as a lecturer if new technology, such as online instruction, replaces standard classroom instruction. Knowing this, teachers are wise to keep up with these technologies while they still have a job, and thus make a quicker transition into a new field. Workers in all industries face these challenges as technology changes rapidly. Reluctance to acquire new training and learn new skills frequently leads to structural unemployment. Government unemployment compensation programs and other social programs make it easier and financially less urgent for some people not to look for a job during a certain period of time. For this reason, countries with more-generous social welfare programs usually experience higher structural unemployment rates.