Understanding the 4 Basic Types of Unemployment

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If you've ever been laid off, then you've experienced one of the types of unemployment that economists measure. These categories are used to gauge the health of an economy — be it local, national, or international — by looking at how many people are in the workforce. Economists use this data to help governments and businesses navigate economic change.

Understanding Unemployment

In basic economics, employment is tied to wages. If you are employed, that means you're willing to work for the prevailing wage being offered to do the job you're doing. If you are unemployed, that means you are unable or unwilling to do that same job. There are two ways of being unemployed, according to economists.

  • Voluntary unemployment occurs when a person is jobless by choice, rather than due to a lack of employment opportunities. Quitting your job because you just won the lottery and no longer need a steady paycheck is one example of voluntary unemployment.
  • Involuntary unemployment occurs when a person is willing and able to work for a given wage but cannot find a job. Corporate layoffs following a merger or a downturn in the economy are two examples of involuntary unemployment. 

Economists are chiefly interested in involuntary unemployment because it helps them gauge the overall job market. They divide involuntary unemployment into three categories.

Frictional Unemployment

Frictional unemployment is the time a worker spends between jobs. Examples of this include a freelance developer whose contract has ended without another gig waiting, a recent college grad seeking his or her first job, or a mother returning to the workforce after raising a family. In each of these instances, it will take time and resources (friction) for that person to find a new job.

Although frictional unemployment is generally considered short-term, it may not be that brief. This is especially true for people new to the workforce who lack recent experience or professional connections. In general, however, economists regard this kind of unemployment as a sign of a healthy jobs market as long as it's low. A low frictional unemployment rate means people seeking work are having a fairly easy time finding it.

Cyclical Unemployment

Cyclical unemployment occurs during downturns in the business cycle when demand for goods and services declines and companies respond by cutting production and laying off workers. When this happens, there are more workers than there are available jobs. Unemployment is the inevitable result.

Economists use this to gauge the health of an entire economy or large sectors of one. Cyclical unemployment may be short-term, lasting mere weeks for some people, or long-term. It all depends on the degree of the economic downturn and what industries are most affected. Economists usually focus on addressing the root causes of the economic downturns, rather than correcting cyclical unemployment itself.

Structural Unemployment

Structural unemployment is the most serious kind of unemployment because it points to seismic changes in an economy. It occurs when a person is ready and willing to work, but cannot find employment because none is available or they lack the skills to be hired for the jobs that do exist. Oftentimes, these people may be jobless for months or years and may drop out of the workforce entirely.

This kind of unemployment may be caused by automation that eliminates a job held by a person, such as when a welder on an assembly line is replaced by a robot. It may also be caused by the collapse or decline of an important industry due to globalization as jobs are shipped overseas in pursuit of lower labor costs. In the 1960s, for example, about 98 percent of shoes sold in the U.S. were American-made. Today, that figure is closer to ten percent.

Seasonal Unemployment

Seasonal unemployment occurs when the demand for workers varies over the course of the year. It can be thought of as a form of structural unemployment because the skills of the seasonal employees are not needed in certain labor markets for at least some part of the year.

The construction market in northern climates depends on the season in a way it doesn't in warmer climates, for example. Seasonal unemployment is viewed as less problematic than regular structural unemployment, mainly because the demand for seasonal skills hasn't gone away forever and resurfaces in a fairly predictable pattern.