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What are the different types of unemployment?

Reports on the number of people unemployed and the unemployment rate are regularly generated by the U.S. Bureau of Labor Statistics and state employment agencies, such as the South Carolina Employment Security Commission. On the surface, an unemployment rate seems like a fairly straightforward indicator of economic conditions. Looking deeper, it is not nearly as simple as it seems. In part, this is because the unemployment rate is affected by trends in economic growth, hiring, layoffs, as well as by trends in the size and composition of the labor force. That is, there are many different factors that together affect the calculation and the correct interpretation of the unemployment rate. The unemployment rate is also made more complicated by the fact that economists recognize different types of unemployment. The interpretation of the importance of an unemployment rate in part depends on the underlying reasons why people are unemployed.

Typically, economists classify unemployment into four different types. These include cyclical unemployment, frictional unemployment, seasonal unemployment and structural unemployment.

• Cyclical unemployment occurs when people are out of work because of a downturn in the economy. That is, as the economy slides into a recession, the resulting layoffs lead to higher cyclical unemployment. Similarly, when an economy is growing and economic output is greater, cyclical unemployment falls. Most of the swings in unemployment over the course of the business cycle are due to changes in cyclical unemployment.

• Frictional unemployment occurs when people are in between jobs, perhaps searching for a new job. There is always some level of frictional unemployment present and is a feature of a dynamic economy.

• Seasonal unemployment refers to workers in certain industries being without work because of the seasonal nature of their employment. A portion of the overall construction workforce, for example, will find themselves without work during the winter when fewer construction projects are available.

• Structural unemployment refers to a mismatch between a worker’s skills and those required for a position. It can also refer to a geographic mismatch between where a potential worker is and where the available jobs are.

Usually, we are not overly concerned with frictional or seasonal unemployment. Frictional unemployment involves a job search that may result in workers searching for and finding a better job. Seasonal unemployment is simply due to the seasonal nature of certain activities.

However, cyclical and structural unemployment are real concerns. Indeed, among the major goals of monetary policy is the promotion of economic and employment growth, which can also be viewed as the goal of keeping cyclical unemployment as low as possible. Structural unemployment may be the most challenging form of unemployment, as it represents a structural mismatch in labor markets in terms of education and labor skills, or in terms of geographic imbalances between labor supply and labor demand. Structural unemployment will likely always be a problem as the economy’s structure is always changing, as are the requirements of businesses in terms of the education and skills of its workers.
 

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