Types of unemployment

  1. Frictional, Structural, Cyclical Unemployment
    • Frictional - time period of finding another job
    • Structural - changes in technology, competition
    • Cyclical - changes in business cycle
  2. Natural Unemployment
    • Frictional & Structural Change
    • No Cyclical Unemployment
    • Influences of Natural Employment Rate
  3. Unemployment & GDP
    • Zero Output Gap
    • Positive Output Gap
    • Negative output Gap
Topic Notes

Frictional, Structural, Cyclical Unemployment

Frictional Unemployment: unemployment that occurs when people are searching for a new job or switching to another job.

Example: Kevin has just graduated from college and is actively spending his time to look for a job.

Structural Unemployment: unemployment that occurs due to a mismatch between the skills of a worker and the jobs that are available. This usually happens when there are technological changes.

Example: Online media draws people away from actual physical newspapers, so journalists and newspaper employees get laid off.

Cyclical Unemployment: unemployment caused by the fluctuations in the business cycle.

During recession, unemployment rate is high because the demand for goods are low.

During expansion, unemployment rate is low because the demand for goods are high.

Natural Unemployment

Natural Unemployment: unemployment that happens from only frictional and structural change. There is no cyclical change at all.

Natural Unemployment Rate: natural employment as a percentage change of the labor force.

Full Employment: The case that occurs when the unemployment rate is equal to the natural unemployment rate.

Influences of Natural Unemployment:
  1. Age Distribution of the Population: a young population has a big number of job seekers every year with high frictional unemployment. An aging population has a low number of job seekers with low frictional unemployment.

  2. Scale of Structural Change: when technological change is very small, some workers can still keep their current jobs. However, if technological changes are big, then millions of jobs can be lost since the jobs will require a complete different set of skills.

  3. Real Wage Rate: Unemployment could depend on the wage or salary of the job. Minimum wage jobs usually attract unproductive workers or lead workers to quit and look for a new one, while jobs above minimum wage (efficiency wage) attract productive workers and discourages them from quitting.

  4. Unemployment Benefits: Unemployment benefits increase the natural unemployment rate because it decreases the opportunity cost of searching for a job.

Unemployment & GDP

Output Gap: the difference between real GDP and potential GDP. The output gap can be zero, positive, or negative.

  1. Unemployment rate = Natural unemployment rate    \;    \; Output Gap is 0.

  2. Unemployment rate < Natural unemployment rate    \;    \; Output Gap is positive. In this case, the real GDP is higher than potential GDP. This happens during the expansion.

  3. Unemployment rate > Natural unemployment rate    \;    \; Output Gap is negative. In this case, real GDP is lower than potential GDP. This happens during the recession because there is high cyclical unemployment.