5.4 Types of Unemployment

Below, we will look at some graphs that show the labour market indicators:

Graph Data Table

Data Table for Fig 5.5

Year	US Male	US Female	CAN Male	CAN Female
1960	71.6999969	42.7999992
1961	70.8000031	43.4000015	61.8499985	41.1899986
1962	70	43.2999992
1963	69.0999985	42.9000015
1964	68.8000031	43.2999992
1965	69	44
1966	69	46.5
1967	69.3000031	47.5999985
1968	68.3000031	48.5
1969	68.8000031	50.4000015
1970	69.4000015	51.2999992
1971	69.5999985	51.0999985	65.2600021	49.2700005
1972	71.3000031	53
1973	72.9000015	54.9000015
1974	73.6999969	56.5999985
1975	72.4000015	57.2000008
1976	72.9000015	58	68.8700027	58.1599998
1977	74.0999985	59.5999985	69.9100037	59.2599983
1978	74.9000015	61.7000008	70.7699966	60.4000015
1979	75	62.5	72.4100037	62.3699989
1980	74.4000015	61.9000015	73.1500015	63.8899994
1981	73.6999969	61.9000015	73.5899963	64.8199997
1982	72.5999985	62	70.7399979	63.8199997
1983	72.5	61.9000015	70.6399994	64.4899979
1984	72.8000031	62.7999992	70.8199997	65.0199966
1985	73	63.7000008	71.2600021	65.8399963
1986	73	64.3000031	72.3099976	67.0800018
1987	72.3000031	64.5999985	73.0100021	67.5100021
1988	72.4000015	64.5	73.0699997	68.0199966
1989	73	64.4000015	73.7799988	68.4599991
1990	71.8000031	62.9000015	72.4000015	67.3399963
1991	70.4000015	61.7000008	70.0800018	66.0999985
1992	70.5	61.7999992	67.7900009	64.4599991
1993	70.1999969	62	66.5400009	62.2400017
1994	70.3499985	62.7400017	65.9000015	61.8600006
1995	70.3799973	62.4900017	64.9000015	61.3400002
1996	69	62.3899994	64.0400009	60.3699989
1997	68.4499969	62.9300003	63.6399994	59.2099991
1998	68.3600006	63.3400002	63.4399986	60.1100006
1999	68.0299988	62.9099998	65.2799988	61.5600014
2000	68.5899963	63	65.8399963	62.8800011
2001	67.0299988	62	66.0299988	63.2400017
2002	65.4899979	61.0600014	67.7399979	65.2600021
2003	63.8600006	59.2299995	68.1500015	66.4800034
2004	63.5900002	58.6599998	67.5899963	66.0699997
2005	62.9500008	58.5800018	66.0299988	65.6999969
2006	63.3199997	57.8600006	66.25	66.2300034
2007	61.5299988	57.2000008	67.4499969	66.4899979
2008	61.0200005	56.5	67.8700027	66.8000031
2009	58.4700012	55.2299995	65.4199982	65.2600021
2010	56.75	53.54

Workers may find themselves unemployed for different reasons. Each source of unemployment has quite different implications, not only for the workers it affects but also for public policy.

Frictional Unemployment

There’s always a situation where some workers are looking for jobs, and some employers are looking for workers. The workers remain unemployed during the time it takes to match them up. Unemployment that occurs because it takes time for employers and workers to find each other is called frictional unemployment.

The case of college graduates engaged in job searches is a good example of frictional unemployment. Those who did not land a job while still in school will seek work. Most of them will find jobs, but it will take time. During that time, these new graduates will be unemployed. If information about the labour market were costless, firms and potential workers would instantly know everything they needed to know about each other, and there would be no need for searches on the part of workers and firms. There would be no frictional unemployment. But information is costly. Job searches are needed to produce this information, and frictional unemployment exists while the searches continue. The frictional unemployment that results from people moving between jobs in a dynamic economy may account for one to two percentage points of total unemployment.

The government may attempt to reduce frictional unemployment by focusing on its source: information costs. Many provincial agencies, for example, offer job search assistance. They encourage firms seeking workers and workers seeking jobs to register with them. To the extent that such efforts make labour-market information more readily available, they reduce frictional unemployment.

Structural Unemployment

The structurally unemployed are individuals who have no jobs because they lack skills valued by the labour market, either because demand has shifted away from the skills they do have or because they never learned any skills. An example of the former would be the unemployment among aerospace engineers after the U.S. space program downsized in the 1970s. An example of the latter would be high school dropouts.

Some people worry that technology causes structural unemployment. In the past, new technologies have put lower-skilled employees out of work, but at the same time, they create demand for higher-skilled workers to use the new technologies. Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become structurally unemployed. That option is more limited for people with no skills and little education.

Structural unemployment can also result from geographical mismatches. Economic activity may be booming in one region and slumping in another. It will take time for unemployed workers to relocate and find new jobs. And poor or costly transportation may block some urban residents from obtaining jobs only a few miles away.

Public policy responses to structural unemployment generally focus on job training and education to equip workers with the skills firms demand. The government publishes regional labour-market information, helping to inform unemployed workers of where jobs can be found. Although government programs may reduce frictional and structural unemployment, they cannot eliminate it.

Cyclical Unemployment

The economy faces a boom and bust, which we call the business cycle. In certain periods, real GDP increases, and in other periods, real GDP decreases. You may recall from Chapter 4 that the increase in GDP is called economic expansion, and the decrease in GDP is called economic recession. Unemployment changes with changes in GDP. People will likely be laid off from jobs when the economy faces a recession. This triggers cyclical unemployment. Therefore, cyclical unemployment is a type of unemployment that changes with the business cycle. During a recession, cyclical unemployment increases, and cyclical unemployment decreases during the expansionary or recovery phase of the economy.

Seasonal Unemployment

Seasonal unemployment may be seen as a kind of structural unemployment since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work, and fishing). The most-cited official unemployment measures erase this kind of unemployment from the statistics using “seasonal adjustment” techniques.

Natural Rate of Unemployment

When the aggregate economy faces only frictional and structural unemployment, we call that kind of unemployment the Natural Rate of Unemployment. When the economy operates at a Natural Rate of Unemployment, there is NO cyclical Unemployment; all the existing unemployment is only frictional and structural.

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. In other words, full employment implies a situation when the economy faces only frictional and structural unemployment. So, the economy operating at natural unemployment means the economy is at full employment. 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 the potential. Finally, when the economy is above full employment, the unemployment rate is less than the natural unemployment rate, and the real GDP is greater than the potential. Operating above potential is only possible briefly since it is analogous to all workers working overtime.