Types (Causes) of Unemployment

Economists classify unemployment into four types according to what caused the unemployment.  If we assume the goal is “full employment” (never mind how we might define or measure “full” right now – there’s mischief there), then what we’re really saying is that our goal is for the economy to create an appropriate a job for every willing and able worker. Then, if we find that the economy is producing some unemployment, we can and should ask ourselves: why hasn’t the economy produced an appropriate job for each worker?  We then essentially classify the economy’s failure to put every available worker into a job as due to one of four reasons.

  • Seasonal
  • Frictional
  • Cyclical
  • Structural

From a policy standpoint, two are troubling and two aren’t.  The two non-troubling causes or types of unemployment are seasonal and frictional.

Seasonal unemployment means the worker (and his/her skills) is unemployed because it’s the wrong time of year.  A classical example is a downhill ski instructor in July, or part-time holiday sales clerk in February. When time passes, winter for the instructor or November-December for the clerk, they’ll be employed again.  Employment data can be statistically massaged to remove the seasonality and so we typically look at unemployment data that is “seasonally adjusted” and we ignore seasonal unemployment.  Besides what kind of policy could we implement to fix it? Legislate Christmas in July? or pass a low mandating snow?

Frictional unemployment means that actually there is a job for the unemployed worker at the time we measured unemployment, it’s just that the worker and the job haven’t matched together yet.  Frictional represents people looking for jobs that are indeed out there for them.  Again, policy, at least at the macro level is not needed here. These workers will find their finds.  At any point in time in a healthy market economy there will always be some people between jobs.  That’s a good thing since it means people are getting matched to jobs where there’s a better fit. The only ways to drive frictional unemployment to zero is to either have instantaneous job searches or nobody ever moves to a better job.

That leaves cyclical unemployment and structural unemployment.  The difference is important in theory but difficult to identify in practice. Cyclical unemployment is workers who are out-of-jobs because employers cannot sell enough goods.  In other words, the economy is depressed. If it grows faster these people will get hired. Cyclical unemployment can fixed by appropriate macro-level stimulus policies.

Structural unemployment however, while of interest to policy-makers, cannot be fixed as easily by macro-level stimulus policies. Structural unemployment occurs when there is a mismatch at the individual worker-level between the skills, experience, qualifications, and location of the unemployed workers and what’s required for the open job opportunities. Examples of structural unemployment at the national level include:

    • technological obsolescence – we no longer need those skills (or as many with those skills). The classic example is horse livery workers once we switched to automobiles around 1910. A more modern example might include photographers or developers of film (the old silver-halide, analog stuff) after the world has switched to digital photography.
    • location mismatch – the unemployed workers live in one state and the open job opportunities exist somewhere else.
    • educational mismatches – the jobs being created require higher educational degrees or specific trainings, but the unemployed workers don’t have those qualifications.
    • inexperience - the firms hiring all want highly experienced workers or only workers who are currently employed.  The unemployed workers either don’t have experience or don’t have recent/current experience.

Structural unemployment can be reduced through policy actions, but they are different, more micro-level policies.  For example job retraining programs can reduce technological obsolescence. Programs to help people move and relocate will address location mismatch. Educational support and grants will address educational mismatches. Both government direct-hire jobs guarantee programs and employer willingess or incentives to do on-the-job training can address technological, educational, and inexperience issues.


Nobel Memorial Prize Winners: Mortensen, Diamond, and Pissarides

The 2010 winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (often incorrectly called the Nobel Prize for Economics) are Peter Diamond, Dale Mortensen, and Christopher Pissarides.  They did work on search models, labor markets, and unemployment.  In particular, their work helps explain why even when there are more job openings than workers, there may still be measurable unemployment called frictional unemployment.  For a good summary of their work and insights, see the New York Times (free registration may be required) at The Work Behind the Nobel Prize By EDWARD L. GLAESER.

So what do these folks suggest for today’s economy where we have very high unemployment that has not come down at all since it went up over 18 months ago?  Let’s go to the New York Times in a different article (emphasis is mine):

The work is especially relevant today, as policy makers try to understand and combat the causes of stubbornly high unemployment in countries like the United States.

In a phone interview, Professor Diamond, 70, said that one of the implications of his work was that more fiscal and monetary stimulus was probably necessary to speed up job growth.

“The slower it happens, the more workers lose their skills and stop searching, and so the process goes more poorly after that,” Professor Diamond said.

President Obama nominated Professor Diamond in April for a Fed board position, where he would serve under his former student, Ben S. Bernanke, the Fed chairman. But in August, under an obscure procedural rule, the Senate sent Mr. Diamond’s nomination back to the White House before starting its summer recess, and a senator questioned his experience.

President Obama renominated Professor Diamond for the Fed position on Sept. 13. A hearing on his confirmation is still to come.

Note too that one of these prize winners, Peter Diamond, has been nominated to join The Federal Reserve bank board of governors.  But, Republicans in the Senate, led by Senator Shelby of Alabama, have stopped the nomination claiming that Peter Diamond is “unqualified”.  Res ipsa loquitur


Frictional, Structural, Cyclical Unemployment Defined

Mark Thoma explains the difference between cyclical, structural, and frictional unemployment:

As I noted in a previous post, economists define three types of unemployment: frictional, structural, and cyclical:

Frictional unemployment is defined as the unemployment that occurs because of people moving or changing occupations. Demographic change can also play a role in this type of unemployment since young or first-time workers tend to have higher-than-normal turnover rates as they settle into a long-term occupation. An important distinguishing feature of this type of unemployment, unlike the two that follow it, is that it is voluntary on the part of the worker.

Structural unemployment is defined as unemployment arising from technical change such as automation, or from changes in the composition of output due to variations in the types of products people demand. For example, a decline in the demand for typewriters would lead to structurally unemployed workers in the typewriter industry.

Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time.

In a recession, frictional unemployment tends to drop since people become afraid of quitting the job they have due to the poor chances of finding another one. People that already have another job lined up will still be willing to change jobs, though there will be fewer of them since new jobs are harder to find. However, they aren’t counted as part of the unemployed. Thus, the fall in frictional unemployment is mainly due to a fall in people quitting voluntarily before they have another job lined up.

But the drop in frictional unemployment is relatively small and more than offset by increases in cyclical and structural unemployment.