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Unemployment/Full Employment - Frictional / Structural / Cyclical

Unemployment/Full Employment - Frictional / Structural / Cyclical

Author: Kate Eskra

Differentiate between the different types of unemployment.

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Source: Image of Business Cycle created by Kate Eskra

Video Transcription

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Hi. Welcome to Macroeconomics. This is Kate. This tutorial is on Unemployment. We'll be looking at full employment and frictional, structural, and cyclical unemployment. As always, my key terms are in red, and my examples are in green.

So in this tutorial, first of all, we'll look at how unemployment in our country is measured. Then we'll define and talk about the different types of unemployment-- frictional, structural, and cyclical. And finally, you'll understand that the natural rate of unemployment is when the economy is operating at full capacity.

So here's a business cycle. And you can see that it's very normal and natural for our economy to go through periods of growth and contraction. Most people when they're looking at this are concerned about things like the unemployment rate and inflation. Economists use all kinds of data to help us predict where the economy is headed, to look at what has just occurred, and to look at what is currently happening in the economy. But calculating unemployment and understanding it is a huge part of this. So that's what this tutorial is all about.

So it's the Bureau of Labor Statistics, or the BLS, that is the government agency that produces the Employment Situation Report. And the unemployment rate is one statistic, one very important statistic, in this report.

So how do they measure unemployment? Well, unemployment, to be unemployed, you have to be a person 16 years of age or older who is not working, has to be available for work, and has to have made efforts to find work during the last four weeks. So keep in mind that because of this definition, you might agree or disagree with various parts of that definition, it's pretty much known that the unemployment rate really doesn't actually represent the full number of people who are actually unemployed because of the various parts of that definition. So just keep that in mind as we talk about unemployment.

So let's just kind of get some terms out here. If there are a lot of people who are just not in the labor force, and this is what a lot of people neglect to understand. So a person who isn't looking for work, because they either don't want a job or they've given up looking, is just considered not in the labor force. People not in the labor force would include anyone who's retired, anyone under age 16-- my 20-month-old son is just not in the labor force. He's not employed, but he's not unemployed either. OK? So full-time students are generally not in the labor force.

So the labor force is not the total population here. It's the number of people employed plus the number of people unemployed. The population is comprised of people in the labor force and not in the labor force. So just wanted to clear that up, because sometimes people think that the unemployment is measured over our entire population. But really it's looking at the people in the labor force.

So then the unemployment rate is the number of people unemployed divided by the labor force, not the population, as I just stated. OK, so it's important to understand that there are different kinds of unemployment. And the reason that we would want to understand the different kinds of unemployment is because depending on the cause of the unemployment rate at the time, the government may want to take action. But there are definitely two of these three types of unemployment I'm going to go over that the government really cannot do anything about. And so if that's what's making up our unemployment rate, then there's no cause for action.

The first type of unemployment that exists is called frictional unemployment. And this is natural separation from employment. This is underlying what we'll get to, the natural rate of unemployment. These are employees looking for positions that are in fact available. Why are they unemployed? Well, they're unemployed because they're changing jobs-- I gave you some examples here. It's recent college graduates looking for their very first job or people making a career change. You know, you're always wanting something better. There's always going to be people in this situation-- someone relocating to a different city.

You're not going to find a job immediately, unless you're very lucky. When you're a college graduate looking for your first job, when you're making a career change, or when you're relocating somewhere else. So this type of unemployment is normal and it will absolutely always exist. OK? So this does not suggest that anything is wrong with our economy.

The second type of unemployment is called structural unemployment, and this is unemployment resulting from changes in the structure of the economy. So what do we mean by that? Well, our economy is constantly changing in how we produce goods and services. We have a very dynamic economy, so people's skills do not match the skills necessary for jobs all of the time. This can be caused by new technology or new resources, changes in consumer demand, globalization, or a lack of education sometimes.

So, for example, the invention of computers means that there's really no longer a need for typewriter repairers. That's usually the classic economics textbook example. These people would not have the skills necessary today to do the jobs that are available. Again, does this really suggest that anything is wrong with the economy? This type of unemployment can be painful and really hard for people, and I certainly have compassion for people in these situations. However, it doesn't mean that we should go back to old and outdated methods of production necessarily. Right? So there's really nothing wrong with the economy. This is a normal type of unemployment that results from a dynamic economy that's always changing.

Here's a type of unemployment that is not healthy, and that's cyclical unemployment. It's called cyclical unemployment, because it follows the business cycle. It falls whenever our economy is doing well, and it increases, unfortunately, as our economy slows. So this is the type of unemployment that we see, like I said, whenever we're in a recession or depression. People who are cyclically unemployed typically are people who do you have the current skills for current jobs. They're not structurally unemployed, but they simply cannot find a job because of our economic situation if we're in a recession.

So this does move with the business cycle, as I suggested, but one thing to keep in mind is that this kind of lags behind a little bit. So people don't tend to actually get their jobs back until just a little bit after the economy has begun to recover. Businesses are slow. They're waiting to see, is this really going to be a recovery? And then they start to hire people back. So this is what we sometimes call a "lagging indicator" in our economy.

All right. Let's talk about the natural unemployment. This is the type of unemployment that occurs, like we said, naturally due to people changing jobs. That's that frictional unemployment I said will always occur. And a dynamic or changing economy-- structural unemployment, or people's skills just don't match what's necessary for the jobs available today.

So this is the rate of unemployment when the economy is operating at full capacity. There's nothing wrong with the economy, and most people suggest that this is somewhere around 5%, although some people think that this is actually starting to increase a little bit, and our frictional plus structural unemployment might actually be a little bit more than 5%. Certainly in some European countries it's definitely higher than 5%. In some of those countries, it can be anywhere between 5% and 10% or so.

So as we've noted a couple of times here, some unemployment is inevitable. It's going to happen because of friction and structural. So full employment does not mean that we have 0% of our population or our labor force unemployed. So the natural rate of unemployment, like I said, probably around 5%, is frictional plus structural unemployment. Another way of phrasing that is that then full employment would be 100% minus that natural rate of unemployment. They basically mean the same thing, it's just in different economic textbooks they might be stated differently. So I figured I'd give you both of them there. So this is defined here as the unemployment level consistent with full employment, typically considered to be about 5%, and attributed to frictional and structural unemployment.

So in this tutorial, we looked at how unemployment is measured, and we talked about the different types of unemployment-- frictional, structural, and cyclical. Keep in mind that the natural rate of unemployment are these two types of unemployment, which are inevitable, and that is when our economy is operating really at full capacity, which is thought to be around 5%, not 0%. Thanks so much for listening. Have a great day.

Terms to Know
Bureau of Labor Statistics (BLS)

The government agency that produces the Employment Situation report of which the unemployment rate is one statistic.

Cyclical Unemployment

Unemployment that follows the business cycle; falls as the economy expands and increases as the economy slows.

Frictional Unemployment

Unemployment = natural separation from employment; underlies the "natural rate of unemployment." Employees looking for positions that are available.

Natural Rate of Unemployment/Full Employment

The unemployment level consistent with full employment; typically considered to be 5% and attributed to frictional and structural unemployment.

Structural Unemployment

Unemployment resulting from changes in the structure of the economy.