Types of Unemployment

Economists Cite Three Main Types But They're All Bad If They Include You

© The Balance, 2018

There are three main types of unemployment: cyclical, structural, and frictional. The first type is, unfortunately, most familiar. It occurs during a recession. The second two make up the natural unemployment rate.

This article summarizes nine types of unemployment. In addition to the four listed above, it explains long-term, seasonal, and classical unemployment. It also explains the terms "real unemployment" and "underemployment."

Cyclical Unemployment

Cyclical unemployment is caused by the contraction phase of the business cycle. That's when demand for goods and services fall dramatically. It forces businesses to lay off large numbers of workers to cut costs.

Cyclical unemployment creates more unemployment. The laid-off workers have less money to buy the goods and services they need. That further lowers demand.

Government intervention, in the form of expansive monetary policy and fiscal policy, is required to stop the downward spiral. After the stock market crash of 1929, the government did not step in right away. This led to the Great Depression, which lasted 10 years and led to a 25% unemployment rate.

Frictional Unemployment

Frictional unemployment occurs when workers leave their old jobs but haven't yet found new ones. Most of the time workers leave voluntarily, either because they need to move, or they've saved up enough money to allow them to look for a better job.

Frictional unemployment also occurs when students are looking for that first job or when mothers are returning to the workforce. It also happens when workers are fired or, in some cases, laid off due to business-specific reasons, such as a plant closure.

Frictional unemployment is short-term and a natural part of the job search process. In fact, frictional unemployment is good for the economy, as it allows workers to move to jobs where they can be more productive.

Structural Unemployment

Structural unemployment exists when shifts occur in the economy that creates a mismatch between the skills workers have and the skills needed by employers.

An example of this is an industry’s replacement of machinery workers with robots. Workers now need to learn how to manage the robots that replaced them. Those that don't learn need retraining for other jobs or face long-term structural unemployment.

A long recession often creates structural unemployment. If workers stay unemployed for too long, their skills have likely become outdated. Unless they are willing and able to take a lower-level, unskilled job, they may stay unemployed even when the economy recovers. If this happens, structural unemployment leads to a higher rate of natural unemployment. 

Natural Unemployment

Natural unemployment consists of two of the three main types of unemployment: frictional and structural. It explains why there will always be some level of unemployment, even in a healthy economy. People will always be changing jobs, and sometimes they leave a job before finding a new one. There will always be some people with skills that are no longer needed.

The lowest level of unemployment was 2.5%, right after the Korean War. Employers had a hard time finding workers. It occurred because the economy was in a bubble that soon burst and led to a recession. A healthy economy will have a natural unemployment rate of 4.5%-5%.

Long-Term Unemployment

Long-term unemployment occurs for those actively looking for a job for over 27 weeks. The effects are devastating. Many employers overlook someone who's been looking for that long. The emotional and financial costs can be very damaging, according to a Pew Research Survey.  For example, 38% have lost self-respect. Almost 30% said their new job was worse than their old one. Sadly, 43% said they will have a hard time achieving their career goals.

Real Unemployment

Real unemployment is not one of the types of unemployment, but it's a term you need to understand. Many people argue that instead of the “official” unemployment rate, we should use an alternate rate. The Bureau of Labor Statistics calls it the "U-6" rate. Others call it the “real” unemployment rate because it uses a broader definition of unemployment.

It includes these two categories:

  1. Marginally attached workers: They haven't looked for work in the past four weeks, but have looked within the past year. Some of them become discouraged workers who have given up looking for work.
  2. Part-time workers: They would like a full-time job, but can only find part-time employment.

Seasonal Unemployment

You might also hear of seasonal unemployment as another type of unemployment. Like its name suggests seasonal unemployment results from regular changes in the season. Workers affected by seasonal unemployment include resort workers, ski instructors, and ice cream vendors. It could also include people who harvest crops. Construction workers are laid off in the winter, in most parts of the country. School employees can also be considered seasonal workers.

The BLS does not measure seasonal unemployment. Instead, it adjusts its unemployment estimates to rule out seasonal factors. This gives a more accurate estimate of the unemployment rate.

Classical Unemployment

Classical unemployment is also known as “real wage unemployment” or “induced unemployment.” It’s when wages are so high that employers can't hire all the available workers. In other words, wages are higher than the laws of supply and demand would normally dictate.

It occurs in one of these three situations:

  1. Unions negotiate higher salaries and benefits.
  2. Long-term contracts set a wage that has become too high due to a recession.
  3. The government sets a minimum wage that's too high.

The result is that companies must pay more per employee, so they can afford fewer employees. Those that are laid off are victims of classical unemployment.

Underemployment

Underemployed workers have jobs, but they aren't working to their full capacity or skill level. This includes those who are working part-time but would prefer full-time jobs. It also includes those who are working in jobs where they aren't being utilized. Underemployment is often caused by cyclical unemployment. During a recession, underemployed workers will take what they can to make ends meet.

Some definitions of underemployment include unemployment. Others include segments of society that are not included in the standard definition of unemployment but are counted in the real unemployment rate. Awareness of underemployment helps you understand the big picture of unemployment.

What Is Unemployment?

The BLS defines unemployment very specifically. To count as unemployed, out-of-work employees must have these three qualities:

  1. They aren't working, even part-time or temporary.
  2. They are available to work.
  3. They actively looked for work in the past four weeks.

This last point is important and often controversial. If someone has stopped looking for work, the BLS no longer counts them as being part of the labor force or as unemployed. But it does report them separately under the category of "marginally attached to the labor force." These are people who look for work in the past 12 months but not in the past four weeks.

The labor force participation rate the number of people either actively employed or unemployed divided by the civilian population not in an institution.

To calculate the unemployment rate, divide the number of unemployed by the number in the labor force.

Article Sources

  1. Federal Reserve Bank of St. Louis. "Unemployment," Accessed Dec. 30, 2019.

  2. Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 2, Table 1. As of July 1 of each year. Accessed Dec. 30, 2019.

  3. Federal Reserve of St. Louis. "Economic Lowdown," Accessed Jan. 4, 2020.

  4. Bureau of Labor Statistics. "Labor Force Statistics from the Current Population Survey," Go to "More Options" and make starting year 1952. Accessed Jan. 21, 2020.

  5. Bureau of Labor Statistics. "Long-term Unemployed," Accessed Jan. 4, 2020.

  6. Pew Research Center. "Lost Income, Lost Friends - and Loss of Self-Respect," Accessed Jan. 4, 2020.

  7. Bureau of Labor Statistics. "What Is Seasonal Adjustment?" Accessed Jan. 4, 2020.

  8. D.J. Daly and D.C. MacCharles. "Focus on Real Wage Unemployment," Page 20. Accessed Jan. 4, 2020.

  9. D.J. Daly and D.C. MacCharles. "Focus on Real Wage Unemployment," Page 24. Accessed Jan. 4, 2020.

  10. OECD. "Glossary of Statistical Terms: Underemployment," Accessed Jan. 4, 2020.

  11. Bureau of Labor Statistics. "Who Is Counted as Unemployed?" Accessed Dec. 30, 2019.

  12. Bureau of Labor Statistics. "Who Is Not in the Labor Force?" Accessed Dec. 30, 2019.

  13. Bureau of Labor Statistics. "Labor Force Participation Rate," Accessed Dec. 30, 2019.

  14. Bureau of Labor Statistics. "What Is the Unemployment Rate?" Accessed Dec. 30, 2019.