Learn the various types of unemployment. See the definition and causes of frictional, cyclical, structural, and other forms of unemployment with examples.
Updated: 11/11/2021
Frictional Unemployment: Definations and Types
What is Unemployment?
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Unemployment is simply a state of being without a job that individuals may face in their lifetime. It can also have a broader connotation that encompasses the unemployment status/rate of an entire population of individuals. Unemployment can be caused by individual consumer choices, economic downturns, government intervention, and more. Because there are many reasons why someone might experience this, there are various types of unemployment that are recognized by governments and economists, which enable them to better understand the population and state of the economy. These types of unemployment include frictional, cyclical, structural, and several others. The metric that is commonly used to measure unemployment is known as the Unemployment Rate . It is measured by the number of individuals who are without jobs but are actively seeking them out divided by the total number of people in the population. This number can be and is calculated locally, statewide, and nationwide.
Frictional Unemployment Definition
Frictional Unemployment is a type of unemployment that can manifest itself due to a wide range of circumstances. The first is due to an employee having been fired or laid off due to any number of reasons by their employer. Another reason an individual may experience frictional unemployment is by transitioning from one job to another, where the time between leaving an old job and starting a new one causes them to be temporarily unemployed. The final circumstance in which someone might experience frictional unemployment is when they have employment opportunities available to them. However, the person chooses to not take advantage of them because they are seeking a specific type of job or employment. For example, Timothy is offered a position as a manager at a local fast-food chain, but he turns it down due to his desire to obtain a higher-paying position at the local steel mill.
Cyclical Unemployment Definition
Cyclical Unemployment is a type of unemployment that is correlated to the state of the economy at any given time. When an economy is doing well, and the Gross Domestic Product (GDP) is growing, commonly referred to as Expansion, the cyclical unemployment rate is low, and employment opportunities are plentiful. In contrast, during such times as when the economy is not doing so well and the GDP is decreasing, commonly referred to as Recession, the cyclical unemployment is much higher due to the more scarce nature of jobs. When recessions hit, people, on average, tend to be more conservative and spend less of their income. These recessions can be the result of several factors including, natural disasters, mismanagement of financial institutions, and deregulation. For example, during the 2008 Economic Recession, due to a multitude of decisions made by certain financial institutions and a lack of government oversight, the U.S. housing market suffered a massive crash, which resulted in financial hardship for millions of citizens. Regardless of the cause, economic recession results in businesses not making as much money that causes them to hire less or even lay off workers. This leads to even more job scarcity and unemployment.
Structural Unemployment Definition
Structural Unemployment is a type of unemployment that has become more prevalent in recent decades. This is when an employee's skills do not or no longer match those that are needed by the market. This has most often occurred with the advent of new machines and technology that has led to many unskilled labor and manufacturing jobs being rendered obsolete. This has also inevitably led to a shift in culture. For example, if John entered into a factory job with only his high school diploma in the 1970s, he might have found himself out of a job due to automation in the early 2000s. This challenges the idea that simply a high school diploma could land him a job that could support his family and retire comfortably in 40 years. John is faced with either being unemployed and unable to support his family or having to seek out alternative employment and potential schooling at the age of 50. This type of situation has led to an increase in the enrollment rates of older adults in higher education programs in recent decades.
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Other Types of Unemployment
Natural Unemployment
Natural Unemployment is a type of unemployment that is not necessarily caused by anything that is perceived as being harmful factors. It simply implies that even with the healthiest and most prosperous economies, there will still be unemployment that occurs naturally through personal choices, as seen in Frictional Unemployment, and innovation in the marketplace, as seen with structural unemployment. Overall natural unemployment is something that should not be looked down upon or feared, but simply as something that will occur naturally within the day-to-day workings of a modern economy.
Classical Unemployment
Classical Unemployment is a type of unemployment that occurs when there is a labor surplus in the market due to either high minimum wages or an over-saturation of labor within a particular market. When employers choose to pay or are forced to pay higher wages, it reduces the number of individuals that they can hire as employers are not able to afford it. This, in turn, results in a large number of people being left without a job, regardless of their skills or qualifications. Classical unemployment is a prime example of the age-old expression "Too much of a good thing". When the market cannot afford to sustain a large number of high-wage workers, it will force some of those individuals to sometimes become underemployed and take lower-paying jobs.
Long-term Unemployment
Long-term Unemployment is when an individual has been unemployed for over a year or longer. This can be caused by several different reasons and situations such as long-term economic recession, sometimes referred to as a Depression. If an economy takes a prolonged period to recover, individuals may find themselves out of work for long periods simply due to reasons associated with cyclical unemployment. Long-term Unemployment, due to its decently broad and general nature, can be often combined with various other types of unemployment. For example, it can be caused by reasons surrounding structural unemployment in the sense that an individual's particular skills are no longer needed in the market. Also, they are unable to find alternative jobs or gain new skills quickly enough to fit into a short-term category.
Seasonal Unemployment
Another type of lesser considered, but widely known, unemployment is Seasonal Unemployment. This type of unemployment is when individuals lose their jobs simply due to the changing of the seasons and quite literally weather-related reasons. For example, an individual who works for a lawn care company may find themselves seasonally unemployed during the winter months when demand for lawn care and landscaping services is much lower throughout the country. Seasonal unemployment can also occur when firms lay off employees after the holidays simply due to the drop in consumer demand for products after that time. This is often why employers will advertise certain positions as "Seasonal Positions" so that potential employees understand the conditional nature of the job offer.
Underemployment
Underemployment is a type of unemployment in which employees are being paid less than they are worth in regards to the skill sets/training they possess and bring to the table. This occurs when there is a shortage of available positions for a particular skill set, leaving highly skilled workers to settle for less skillful and often lower-paying jobs, such as a Licensed Auto Mechanic, settling for a cashier job at the local grocery store. This can result from several different reasons, including economic recessions, over-saturation of the market in regards to their particular skill set, or even an individual's geographic location. For example, if Elizabeth earns a Ph.D. in Marine Biology, she is far less likely to find gainful employment to match her skill sets if she only attempts to find work in the middle of rural Idaho.
Regional Unemployment
Regional Unemployment is a lesser considered type of structural unemployment. It is caused by certain skill sets no longer being valued and needed by the market. However, it is limited to a certain region or area. For example, if a once-prosperous coal mine in rural West Virginia is suddenly shut down due to financial collapse or natural disasters. Then, those highly skilled employees may suddenly find themselves regionally unemployed simply due to a lack of available work in their immediately accessible area. Other reasons for this type of unemployment could include new environmental laws implemented by governments, depletion of natural resources in a given area, or simply the company choosing to relocate due to the relative rise of labor costs in a given area. For example, if an electronics company discovers that it can move its factory from a state that has a $15 minimum wage to one that has a $7 minimum wage, it may choose to do so to reduce its labor costs. Doing so would immediately put those workers, living in the first state, out of work simply due to how much their labor cost the company.
Voluntary Unemployment
Voluntary Unemployment can be closely related to a type of frictional unemployment in that it results from an individual willingly choosing to leave or not accept a particular job that may be available. These people may be seeking alternative employment for various reasons, or they may simply be choosing to be unemployed and not seeking work for a multitude of reasons as well. For example, Steven has made enough money to take a year off from work and quit his job to travel the world. Here, he is voluntarily choosing to be unemployed for at least temporarily and isn't seeking a job. There are also examples of individuals who voluntarily choose to be unemployed simply because they can survive by other means, such as having someone else support them financially.
Institutional Unemployment
Institutional Unemployment is a unique type of unemployment that results from certain factors stemming from the government, firms, or society that provide individuals with an incentive to remain unemployed and not seek out jobs. Such incentives could include extensive social safety net programs, high minimum wage laws, unionization agreements, etc. If someone is guaranteed certain entitlements or benefits that allow them to sustain themselves without being employed, they may decide that they are better off without a job. For example, if Tony is currently being supported through unemployment insurance that pays him $600 per week for no work, he has very little incentive to pursue a job opportunity that will only pay him $400 per week for 40 hours of work. A combination of public policy laws and economic conditions helps to determine whether or not Institutional Unemployment is likely to occur or not based on incentives.
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Seasonal Unemployment vs. Structural Unemployment
The primary difference between seasonal unemployment and structural unemployment is that seasonal unemployment tends to be much more predictable and predicated on more tangible factors such as weather. This predictability allows individuals and firms the opportunity to plan around the problem and prepare for times of the year where unemployment is higher. For example, if a roofing company knows that it tends to start snowing in November, they can inform their employees ahead of time that they will lay off till the spring months, such as March. Structural unemployment is far less predictable and has a much less likely chance of reversing course once it has occurred. This is simply because once the market shifts away from a particular skill set, such as a lack of need for cashiers due to order kiosks, it is extremely unlikely that it will shift back and need that skill set again.
Lesson Summary
Overall, understanding Frictional Unemployment along with all of the other various types of unemployment is crucial for obtaining a complete picture of a particular country's economic state as well as the social structure. Understanding unemployment rates from region to region can assist local and regional governments in properly allocating capital and other valuable resources to ensure that the well-off continue to prosper and that individuals in need are given the support. From an economic perspective, unemployment is something that is always going to exist within an economy regardless of how advanced or wealthy it is. There will always be someone transitioning from one job or another or another simply choosing not to work for various personal reasons. The ultimate goal of any economy is not to eliminate unemployment but to simply track it and mitigate it whenever possible, ensuring that the most prosperous outcome is achieved for everyone.
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Frequently Asked Questions
What is frictional unemployment and its causes?
Frictional Unemployment is a type of unemployment that is caused by individuals being fired, laid off, or seeking alternative employment in the marketplace. Another reason can be transitioning from one job to another, where the time between leaving an old job and starting a new one causes people to be temporarily unemployed.
What is the main cause of cyclical unemployment?
The main cause of Cyclical Unemployment is an economic downturn. This can be caused by a number of factors including natural disasters, government mismanagement, financial institution problems, and more.
What are the 3 types of unemployment?
The three types of unemployment are Frictional, Cyclical, and Structural Unemployment. These are the main three while there are also numerous other minor types of unemployment.
What does cyclical unemployment mean?
Cyclical Unemployment is unemployment that is caused due to the current state of an economy at any given time. For example, if the economy is doing well, cyclical unemployment will be low and vice versa.
What are some examples of frictional unemployment?
Examples of Frictional Unemployment could include someone being fired from their job due to behavioral issues or lack of productivity. It could also be someone being laid off or choosing to leave their job for alternative opportunities.
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Frictional Unemployment: Cyclical and Other Types
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