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.