Types of Unemployment by Omkar Abhyankar

In the previous article, we strictly defined unemployment and we learned when a person is considered to be unemployed. In this article, we will dive deeper into unemployment by learning about the specific types of unemployment. Economists classify unemployment into different categories to get a general understanding of why the unemployment rate is the way that it is. There are three types of unemployment: structural unemployment, frictional unemployment and cyclical unemployment. Let's take a look at each type of unemployment.

Structural Unemployment:

The first form of unemployment is called “Structural Unemployment.” This form of unemployment occurs when a worker lacks the ability to work a job to a certain standard. In other words, when a worker is unemployed because they do not have the proper skills to perform certain tasks efficiently, they are considered to be structurally unemployed.The most common cause for structural unemployment is due to an improvement in technology. Technological advancements may make carrying out certain tasks more efficient and as a result, the worker’s skill may no longer be needed.

Frictional Unemployment:

Another form of unemployment is called “Frictional Unemployment”. This is the unemployment which occurs when a worker is moving from one job to another. When switching jobs, there is a brief period where the worker does not have a job. In that period, the worker would be considered to be frictionally unemployed. 

Cyclical Unemployment:

This last form of unemployment is called “Cyclical Unemployment”. This form of unemployment occurs during recessions. On a general basis, a recession is a period of economic decline. During a recession, demand for output is low and as a result, the demand for labor also decreases, causing workers to be laid off and unemployed. We will talk about this form of unemployment more in future articles.

Identifying which type of unemployment is more prominent in an economy can help economists reason for a certain unemployment rate and find solutions when needed. It is important to note that unemployment is inevitable and all economies will have some levels of unemployment. How much unemployment is considered healthy and how much can be considered a problem? This is decided based on the “natural rate of unemployment”. The natural rate of unemployment labels the minimum amount of unemployment which will always be present in an economy. Infact, the natural rate of unemployment is completely made up of structural unemployment and frictional unemployment.

Natural Rate of Unemployment = Structural Unemployment + Frictional Unemployment.  

Why does the sum of the structural unemployment and frictional unemployment decide the minimal amount of unemployment in an economy? This is because structural and frictional unemployment are always present in an economy. People are always switching between jobs causing frictional unemployment and due to competition in the labor force, some workers will outperform other workers causing these other workers to be structurally unemployed. Therefore, having structural and frictional unemployment does not necessarily reflect negatively on an economy. Cyclical unemployment on the other hand is not good for an economy and can be avoided. Having cyclical unemployment in an economy would reflect that workers are not able to work a job due to the sluggish demand for output. An increase in cyclical unemployment will push the current unemployment away from the natural rate of unemployment reflecting an unhealthy economy. By categorizing unemployment and collecting statistics of each type of unemployment, economists can understand whether the unemployment rate is healthy or unhealthy and can inform the government to take proper action if necessary.