Describe the four types of unemployment.
First, please note that economics texts sometimes refer to only three types of unemployment. The fourth, seasonal unemployment, is sometimes omitted. When we are using a four-type typology, we say that the types of unemployment are structural, frictional, cyclical, and seasonal.
Frictional unemployment is a kind of unemployment that occurs when people are “between jobs” or are looking for their first jobs. It is a kind of unemployment that occurs when the economy is trying to match people and jobs correctly. So, if you get fired for poor work, if you quit because you dislike your job, or if you are just looking for your first job, you are frictionally unemployed.
Seasonal unemployment occurs when people are not working because their jobs only exist at some times of the year. Agricultural and construction workers are examples of this type of unemployment.
Structural unemployment occurs when a given set of skills is no longer needed in a given economy. For example, when automobiles became prevalent in the United States, many people who worked with horses became structurally unemployed. In the US today, many people who worked in manufacturing are now structurally unemployed.
Finally, there is cyclical unemployment, which economists say is the worst kind. In this kind of unemployment, people are out of work because the economy has slowed and there is no demand for whatever the workers make. This sort of unemployment occurs during recessions.
Some textbooks list four kinds of unemployment while others list three. For those textbooks that list four, the types are structural, frictional, cyclical, and seasonal. The four types are different in that they are caused by different things. Let us look at each of the four in turn.
Structural unemployment is caused by a mismatch between a person’s skills and the jobs that are available. If a person’s skills are no longer needed in an economy, that person is structurally unemployed. The classic example of this is a person whose job has been taken over by a machine or has been sent to a foreign country where wages are lower.
Frictional unemployment is the sort that happens when people are looking for the ideal job. A person is frictionally unemployed if they have been fired for being bad at their job. They are looking for a job they can do well. A person is frictionally unemployed if they have quit their job to look for one they like better. They are also frictionally unemployed if they are looking for their first job.
Cyclical unemployment is the sort that is caused by bad economic times. Here, a person is good at their job and their job would be needed in our economy except for the fact that times are bad. This would be someone like an auto worker who is laid off because the company is not selling enough cars.
Seasonal unemployment happens when a person’s job is only available at certain times of year. Agriculture and construction are classic examples of these. These are jobs that can typically be done only at a certain time of year.
1. Frictional unemployment: This is typically temporary unemployment caused by the time people take to move between jobs, e.g. graduates or people changing jobs. There will always be some frictional unemployment in an economy because information is not perfect and it takes time to find work.
2. Structural unemployment: can be caused by occupational immobility. This refers to the difficulties in learning new skills applicable to a new industry, and technological change, e.g. an unemployed farmer may struggle to find work in high tech industries. In other words, structural unemployment occurs when there is a mismatch between job requirements and employee skills.
3. Classical or Real wage unemployment: This occurs when wages in a competitive labour market are pushed above the equilibrium, e.g. at W2 the supply of labour (Q3) is greater than the demand for labour (Q2). Wages could be pushed above the equilibrium level by minimum wages or trade unions. This is sometimes known as ‘disequilibrium’ employment.
4. Voluntary unemployment: This occurs when people choose to remain unemployed rather than take jobs available. For example, if benefits are generous, people may prefer to stay on benefits rather than get work. Frictional unemployment is also a type of voluntary unemployment as they are choosing to wait until they find a better job.
5. Demand Deficient or ‘Cyclical Unemployment: Demand deficient unemployment occurs when the economy is below full capacity. For example, in a recession Aggregate Demand (AD) will fall leading to a decline in output and negative economic growth. With a fall in output firms will employ fewer workers because they are producing fewer goods. Also some firms will go out of business leading to large scale redundancies. In recessions, unemployment tends to rise rapidly as firms lay off workers.