The 3 Types of Unemployment

There are a lot of different reasons why someone might find themselves unemployed. When it comes to the overall economy, there are only three. Depending on the economic conditions, all unemployment can be categorized as one of these three types: Structural, Frictional, or Cyclical.

Structural Unemployment

One of the types of unemployment is structural. This occurs when the conditions in the economy demand a different skill set than current workers have. It can also be thought of as technology taking over jobs, although structural unemployment as a whole is larger than that. Regardless, structural unemployment is a mismatch between the jobs that are available and the workers that are in the job market.

For example, when industrial processes made blacksmithing obsolete as a profession, the economy demanded machine operators instead of smiths.
The same thing can be seen today with some computer software, as jobs are replaced by technicians who are needed to install and maintain the software. Structural unemployment can be ameliorated by employees acquiring new skills, but that process typically takes a long time.

Frictional Unemployment

Another type of unemployment is frictional. Frictional unemployment is a temporary condition that results from imperfect information about the job market by job seekers. That is, when someone is looking for work but can't find it. Although frictional unemployment is always present in every market, it's a short-lasting type of unemployment that comes and goes. That stands in sharp contrast to structural unemployment, which is a longer-term condition of the economy.

For instance, when someone graduates college and is looking to upgrade their job from the service industry to finance, that is a case of frictional unemployment. This sort of unemployment can be brought on by a host of reasons, including an upgraded skill set, being fired, or just looking for a change in work. Frictional unemployment is the most common type of unemployment in the economy today.

Cyclical Unemployment

The final type of unemployment is cyclical. The cycle that this type of unemployment is referring to is one of the economy itself. For example, during the Great Depression, when the unemployment rate was 25%, the cause was cyclical unemployment. This type of unemployment is caused by long-term economic conditions, which move cyclically, and so it takes awhile to pass.

Cyclical unemployment is a direct consequence of the health of the economy. It's caused by natural cycles in the economy, periods of growth and especially contraction. There is little that can be done to combat cyclical unemployment, save waiting for the current cycle to pass.

Unemployment Beyond the Jobless Numbers

You can see that there's a lot more to the unemployment picture than the current jobless numbers. Each type of unemployment is different, in that they are caused by different circumstances and take different amounts of time to pass. When we talk about unemployment we're really referring to a whole host of economic conditions that cause people to lose their jobs. It's important to keep that in mind when you're trying to judge the health of an economy by its rate of unemployment.
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2016. Content published with author's permission.

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