Types of Unemployment Overview:
Unemployment is a macroeconomic problem that affects people and the economy as well. There are three types of unemployment as referenced by economists: Frictional, structural, and cyclical.
Economists say that the economy is “fully employed” when there is only frictional and structural unemployment. In other words, full employment occurs when there is no cyclical unemployment.
This article covers two other less common but important types of unemployment: Classical and seasonal unemployment. Let’s proceed to the 5 types of unemployment.
Frictional unemployment occurs when,
- Some of the workers move voluntarily from one job to another
- Some of them have been fired so looking for another job
- Many young workers look for their 1st job
Frictional unemployment is a short-term, natural, and inevitable part of the economy. Every time some workers are “searching for jobs” that’s why economists call it search unemployment and natural unemployment.
Frictional unemployment is beneficial for the economy because many workers are moving from low-paying and low-productivity jobs to higher-paying and higher-productivity jobs.
Structural unemployment results when the composition of the workforce force is not compatible with the new structure of job opportunities.
It happens when there are shifts in the economy that create a mismatch between the existing skills of workers and the skills required by employers.
Why it all happens? Well, Changes over time in consumer demand and technology affect the “structure” of total labor demand, both occupationally and geographically.
Workers who find that their skills and experience have become obsolete or do not meet the industry standards, they are structurally unemployed until they adapt or develop their skills as required by the employers.
Among the types of unemployment in economics, structural unemployment is long-term, natural, and also an inevitable part of the economy.
Cyclical unemployment begins in the recession phase of the business cycle. It is concerned with the demand for goods and services. When the demand for goods and services falls, unemployment rises.
It typically depends on the ups and downs of business cycles, particularly recession and expansion. That’s what we call it cyclical unemployment.
Cyclical unemployment is considered as a serious problem when it occurs. Companies fire workers and stop the hiring process when the economy moves downward and thus unemployment rises at an accelerated rate. Conversely, when business cycles are at their peak, cyclical unemployment will decline, because there is a high demand for labor.
The 25 percent unemployment rate in the depth of the Great Depression in 1933 reflected mainly cyclical unemployment.
Among the types of unemployment, classical unemployment occurs when the real wages for workers in an economy are too high that employers can’t hire all the available workers. It is also known as real wage unemployment or induced unemployment.
Let’s see the three situations when classical unemployment occurs:
- Trade unions bargain for wages above the equilibrium
- The government sets a minimum standard wage that’s too high
- During deflation, prices decline to maintain full employment. It may be necessary to cut wages in this situation. Therefore, classical unemployment is more likely to occur during this period.
Many industries are highly dependent on specific seasons during the calendar year. Workforce affected by seasonal unemployment include rice industry workers, resort workers, ice cream vendors, tourism workers, and more others.
Unemployment rises in off-peak season and declines in on-peak season. It is not much harmful as standard unemployment because it is predictable and workers can eventually adjust to other sources of income.