to recognize that there are different types of unemployment, some of longer duration and/or

more serious consequence to the economy than others.

Frictional unemployment is unemployment due to the natural frictions of the economy, which

is caused by changing conditions and represented by -- here's the most important part -- qualified

individuals with transferable skills who change jobs. Examples might include a short-term

contract engineer, who seeks a new position every 6 to 18 months, as his/her contract

expires. This person has the skills to move to a new contract position. Or, what about

a full-time college student was not previously unemployed, but starts interviewing for jobs?

Once the student starts seeking work, he/she becomes part of the labor force. As long as

he/she has the education and skills necessary to start a job, it counts as frictional unemployment.

Frictional unemployment is typically of shorter duration than some of the other forms of unemployment.

Structural unemployment is unemployment due to structural changes in the economy that

eliminate some jobs and create others for which the unemployed are unqualified. One

really good example that I can think of is from the 1990s, when the North American Free

Trade Agreement (NAFTA, for short) was passed. With the passage of NAFTA, the US lost a lot

of blue-collar, factory-type jobs, but gained white-collar jobs, say, in computer programming

or finance. Workers laid off from their factory jobs couldn’t very well apply right away

for high-tech job; they would need to go back to school for a whole new type of training

and education. Some who got laid off were older workers, who were not interested in

going back school at all. Overall, structural unemployment is a longer-term issue than frictional

unemployment.

Seasonal unemployment is unemployment due to seasonal trends. For example, jobs related

to a seasonal crop, or a seasonal activity, such as skiing, or seasonal demand like at

Christmas. Seasonal unemployment is periodic and predictable, and can therefore be planned

around.

Cyclical unemployment -- unemployment due to contractions in the economy. The economy

moves in cycles. When the economy does well, there are lots of jobs and unemployment is

down. When the economy does poorly, there are fewer jobs and the unemployment rate goes

up. The biggest problem with cyclical unemployment is that no two cycles are the same in terms

of severity or length, so it's difficult to tell when jobs will come back. It could be

a few months, or over year. In the case of the Great Depression, it was years before

the economy recovered and jobs were created.

Now that we’ve considered these four types of unemployment, think back to the second

macroeconomic goal: low unemployment. Notice the goal is NOT zero unemployment, but rather

low unemployment. Why do you suppose this is? One reason is that, in a dynamic economy,

where labor is allowed to move freely from one job to another, or even one career to

another, there will always be some amount of frictional unemployment. Similarly, the

continual change that occurs an innovative society means that there is always some structural

unemployment. To eliminate these, you’d need to appoint each employee to a job, and

that would be the person's job for life. Plus, you could never allow any underlying structural

change, like technological improvements.

No, zero unemployment isn't the goal, but low unemployment is. How low? Well, the natural

rate of unemployment -- that caused only by frictional and structural factors -- is our

target. If we've achieved the natural rate of unemployment, we have full employment.

Full employment is the condition that exists when the unemployment rate is equal to the

natural unemployment rate. For many years in the US, the natural rate of unemployment

was thought to be 5 to 6%. But then, with the unprecedented economic expansion of the

US economy in the 1990s, we experienced 4% unemployment without suffering any negative

inflationary side effects. If we go much lower than this though, companies would start competing

to get workers by offering higher salaries and more benefits, which would in turn drive

product prices upward, causing inflation.

NEXT TIME: GDP TRANSCRIPT0 (MACRO) EPISODE 19: TYPES OF UNEMPLOYMENT