Economics 101 / Types of Unemployment by St. Louis Fed

When we talk about unemployed resources, we usually do so with respect to labor (e.g., “Uncle Billy lost his job and he is now unemployed”). The blue line on the chart illustrates the proportion of the labor force not being used to produce goods and services—that is, the unemployment rate. Let’s discuss the three types of unemployment to explain why some resources, especially human resources, go unused.

First, some human resources may be unemployed because it takes time for skilled workers to find a job that uses their skills. This is known as frictional unemployment. For example, when students graduate from college, it may take some time for them to find a suitable job or they may need to relocate to find a job in their field. When these graduates are actively seeking work but not working, they are considered frictionally unemployed. In other words, they have skills that employers are seeking, but it takes some time for them and a prospective employer to realize they are a match. During this time, their human resources (i.e., labor) go unused.

Second, human resources may be unemployed because they do not possess the skills employers are seeking. This is known as structural unemployment. For example, in the early days of the telephone, switchboard operators (also known as telephone operators) literally had to manually connect two lines to complete a phone call. The United States had 373,000 switchboard operators in 19682 but only 10,710 as of May 2012.3 Switchboard operators gradually became unemployed because of technological advancements. Technology allowed people to connect automatically and switchboard operators were no longer necessary to connect the phone lines. In other words, the switchboard operators’ skills were no longer needed. Operators needed time to learn new skills and become employable again; during this period their human resources (i.e., labor) went unused.

Because the economy is dynamic, there is always some level of frictional and structural unemployment, which is known as the natural rate of unemployment. However, there is a major difference between frictional and structural unemployment. Those who are frictionally unemployed have useful, transferable skills. Those who are structurally unemployed do not.

Let’s look at the chart again. Notice the difference between the natural rate of unemployment (the red line) and the current unemployment rate (the blue line). The difference between these two lines shows the third type of unemployment—cyclical unemployment. This type of unemployment occurs when the economy has slowed, fewer goods and services are being purchased, and, as a result, fewer workers are needed to produce those goods and services. Think about the economy during the Great Recession of 2007-09. Because the economy was slowing, people started cutting back on expenses such as cell phones. If people stopped buying new cell phones, Apple might have to cut back on the number of people employed to make iPhones or stores to sell them. In this case, you might go to the mall and see a former Apple store sitting vacant as an unused resource. And the people who worked in that store would consequently be unemployed—unused resources.

Chosen excerpts by Job Market Monitor. Read the whole story at 

via Page One Economics – St. Louis Fed.