Types of Unemployment

Frictional unemployment is the normal churn of a working economy. A worker quits to find something better, a new graduate is sending out resumes, a new parent is job hunting after leave. Their skills are fine; they just need time to match with the right employer. Structural unemployment runs deeper: the worker's skills no longer fit what employers want, often because technology or trade has permanently reshaped an industry. A coal miner whose mine closes as the country shifts to solar and gas faces structural unemployment, because retraining, not just a few weeks of searching, is what she needs. Cyclical unemployment is different again: it rises and falls with the business cycle. When the economy slides into recession, spending drops, firms stop hiring or lay people off, and workers lose jobs through no fault of their skills or timing, only bad timing in the cycle.

This is why a healthy economy never hits zero percent unemployment. Frictional and structural unemployment persist even when the economy is running well, since people always change jobs and industries always evolve. Economists call the sum of frictional and structural unemployment the natural rate, and when the economy is producing at that rate, with cyclical unemployment at zero, it's said to be at full employment, not zero unemployment.

This connects directly to the output gap. When cyclical unemployment is positive, actual output sits below potential output, a recessionary gap. When the economy overheats and cyclical unemployment goes negative, actual output pushes above potential, an inflationary gap. Structural unemployment can also shift permanently when automation wipes out an entire occupation, raising the natural rate itself rather than just causing a temporary dip.