Different types of unemployment, and how they are measured

The unemployment rate has become a highly talked about issue in the news recently, but it is important to understand some of the attributes of the unemployment rate so that you are not deceived by reports.  The first is that the unemployment rate can go down, which makes it seem like the economy is recovering when in fact workers are suffering from the discouraged-worker effect.  This happens when people STOP looking for jobs, and leave the labor force.  Because they are not actively looking for a job, they are no longer considered unemployed and the unemployment rate drops.

The different types of unemployment are:

Frictional unemployment:  Those who are unemployed because of normal turnover in the labor markets.  Generally frictional unemployment deals with short term factors, such as looking for jobs, and trying to match up workers skills with the skills desired by employers.  Usually low skilled sectors have low frictional unemployment (because there are a lot of jobs and a lot of people), while high skilled sectors have high frictional unemployment (because it takes longer to find that person with a Ph.D in marine molecular biology). 

Structural unemployment:  Those who are unemployed because  of changes in the structure of the economy  that results in a large amount of jobs lost in certain industries.  This type of unemployment occurs when certain skills become obsolete, the government nationalizes an industry, or outsourcing becomes popular.  This unemployment is more of a long trend phenomena than frictional unemployment is.  Recent examples in the US include the outsourcing of manufacturing jobs to developing countries.

Cyclical unemployment:  Those who are unemployed because the economy is contracting, or going through a recession are considered cyclically unemployed.  If a firm fires you because it cannot sell enough product now, but hopes to recover soon, then it is part of a cycle.  Generally those who are unemployed cyclically can find jobs again after the recession ends.

Natural unemployment rate:  Frictional and Structural unemployment is considered a naturally part of every economy.  Because not everyone can be employed at the same time due to searching for jobs, and economic restructuring, we will always have some unemployment. 

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