What Are the Three Types of Unemployment?

Unemployment describes a situation where individuals are actively seeking employment but are unable to secure a job. A lower unemployment rate suggests a robust economy, while a higher rate signals economic weakness.

Unemployment is not a singular phenomenon, but a complex issue with various underlying causes. Economists categorize unemployment into different types based on these root causes.

Frictional Unemployment Defined

Frictional unemployment refers to the temporary period of joblessness experienced by individuals transitioning between jobs, entering the workforce for the first time, or re-entering it after an absence. This type of unemployment is considered a natural and healthy part of a dynamic economy. It arises because it takes time for workers to find suitable job openings and for employers to find qualified candidates.

Examples include recent college graduates searching for their first professional role, individuals voluntarily leaving one position for a better opportunity, or someone relocating to a new city and needing time to find new employment. This type of unemployment is short-lived, lasting less than a month.

Structural Unemployment Defined

Structural unemployment occurs when there is a mismatch between the skills workers possess and the skills employers require, or a geographical disconnect between available jobs and job seekers. This form of unemployment results from long-term shifts within the economy. Such shifts can include technological advancements, increased automation, globalization leading to job outsourcing, or changes in consumer demand that cause certain industries to decline.

For instance, factory workers whose tasks become automated by machines, or coal miners in regions where mines have closed, may experience structural unemployment because their specific skills are no longer in demand. Addressing structural unemployment requires affected individuals to undergo retraining to acquire new skills or to relocate to areas with more job opportunities. This type of unemployment can be long-term, lasting a year or more.

Cyclical Unemployment Defined

Cyclical unemployment is directly tied to the fluctuations of the business cycle, increasing during economic downturns and decreasing during periods of economic expansion. It emerges when there is a decline in the demand for goods and services across the economy. As consumer spending and investment decrease, businesses reduce production, which leads to layoffs and a slowdown in hiring.

An example of cyclical unemployment is the widespread job losses seen during an economic recession, affecting various sectors like hospitality, manufacturing, and retail. When the economy contracts, companies aim to cut costs, and labor expenses are among the first to be reduced. This type of unemployment is a direct consequence of insufficient aggregate demand in the economy, and it diminishes as the economy recovers and demand for goods and services increases.

Understanding Natural Unemployment

Even in a healthy, expanding economy, some level of unemployment will always exist. This persistent level is known as the “natural rate of unemployment.” It represents the sum of frictional and structural unemployment.

The natural rate is not zero; it is the lowest sustainable unemployment rate an economy can achieve without triggering inflationary pressures. Cyclical unemployment is the component that causes the actual unemployment rate to deviate from this natural rate, rising above it during recessions or falling below it during booms. Understanding this natural rate helps economists and policymakers assess the labor market beyond short-term economic fluctuations.