Now that we know the term “unemployed” means not working, but seeking work, you need
to recognize that there are different types of unemployment, some of longer duration and/or
more serious consequence to the economy than others.
Frictional unemployment is unemployment due to the natural frictions of the economy, which
is caused by changing conditions and represented by -- here's the most important part -- qualified
individuals with transferable skills who change jobs.
Examples might include a short-term contract engineer, who seeks a new position every 6
to 18 months, as his/her contract expires.
This person has the skills to move to a new contract position.
Or, what about a full-time college student was not previously unemployed, but starts
interviewing for jobs?
Once the student starts seeking work, he/she becomes part of the labor force.
As long as he/she has the education and skills necessary to start a job, it counts as frictional
unemployment.
Frictional unemployment is typically of shorter duration than some of the other forms of unemployment.
Structural unemployment is unemployment due to structural changes in the economy that
eliminate some jobs and create others for which the unemployed are unqualified.
One really good example that I can think of is from the 1990s, when the North American
Free Trade Agreement (NAFTA, for short) was passed.
With the passage of NAFTA, the US lost a lot of blue-collar, factory-type jobs, but gained
white-collar jobs, say, in computer programming or finance.
Workers laid off from their factory jobs couldn’t very well apply right away for high-tech job;
they would need to go back to school for a whole new type of training and education.
Some who got laid off were older workers, who were not interested in going back school
at all.
Overall, structural unemployment is a longer-term issue than frictional unemployment.
Seasonal unemployment is unemployment due to seasonal trends.
For example, jobs related to a seasonal crop, or a seasonal activity, such as skiing, or
seasonal demand like at Christmas.
Seasonal unemployment is periodic and predictable, and can therefore be planned around.
Cyclical unemployment -- unemployment due to contractions in the economy.
The economy moves in cycles.
When the economy does well, there are lots of jobs and unemployment is down.
When the economy does poorly, there are fewer jobs and the unemployment rate goes up.
The biggest problem with cyclical unemployment is that no two cycles are the same in terms
of severity or length, so it's difficult to tell when jobs will come back.
It could be a few months, or over year.
In the case of the Great Depression, it was years before the economy recovered and jobs
were created.
Now that we’ve considered these four types of unemployment, think back to the second
macroeconomic goal: low unemployment.
Notice the goal is NOT zero unemployment, but rather low unemployment.
Why do you suppose this is?
One reason is that, in a dynamic economy, where labor is allowed to move freely from
one job to another, or even one career to another, there will always be some amount
of frictional unemployment.
Similarly, the continual change that occurs an innovative society means that there is
always some structural unemployment.
To eliminate these, you’d need to appoint each employee to a job, and that would be
the person's job for life.
Plus, you could never allow any underlying structural change, like technological improvements.
No, zero unemployment isn't the goal, but low unemployment is.
How low?
Well, the natural rate of unemployment -- that caused only by frictional and structural factors
-- is our target.
If we've achieved the natural rate of unemployment, we have full employment.
Full employment is the condition that exists when the unemployment rate is equal to the
natural unemployment rate.
For many years in the US, the natural rate of unemployment was thought to be 5 to 6%.
But then, with the unprecedented economic expansion of the US economy in the 1990s,
we experienced 4% unemployment without suffering any negative inflationary side effects.
If we go much lower than this though, companies would start competing to get workers by offering
higher salaries and more benefits, which would in turn drive product prices upward, causing
inflation.
NEXT TIME: GDP TRANSCRIPT0 (MACRO) EPISODE 19: TYPES OF UNEMPLOYMENT