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Three Types of Unemployment

July 13, 2017

By Timothy S. Sullivan, Ph.D.

Earlier this week, when discussing the latest unemployment data, I referred to the concept of "natural unemployment." In particular, I pointed out that the June 2017 national unemployment rate of 4.4% was below the level that most economists consider to be "natural."

Which leads to the question, what is natural unemployment? It turns out that, for a term that has been used a lot in the popular press, it's not a very simple idea. And, as is often the case, economists don't universally agree on its value, its definition, or (in some cases) even its existence. 

In today's posting, I'll take the first step by discussing three of the many reasons that a worker might be unemployed -- frictional unemployment, seasonal unemployment, and structural unemployment. What they have in common is that none of them are necessarily signs of a bad economy. 

Frictional unemployment exists because it takes time for job seekers to locate job openings. In fact it's sometimes called "search unemployment." As an analogy, think of someone selling peaches at the farmers market for $8 per bag. Even if $8 is the perfect price to charge, it will still take some time before peach buyers meander through the stalls and locate the farmer's table. During this time, the peaches sit on the table -- unpurchased. By the end of the day, the peaches will find a home. But while we're waiting for the buyer to locate the seller, the peaches sit unsold. In the same way, a new college graduate might spend weeks filling out job applications and going on interviews. But while we're waiting, the new graduate remains unemployed. While there certainly are things government might do to help speed up (or for that matter slow down) the process, there will always be a time lag between when a job opens and when it's filled.

Seasonal unemployment exists because some types of workers are only needed at certain times of the year (or month). It's easy to think of some examples -- jobs at Christmas tree lots disappear each year on December 25th. But employment in a number of industries, such as construction, golf courses, nature parks, department stores, and skiing facilities ebb and flow each year at predictable times. Some peak in the summer, and others peak in the winter. It's because of these systematic patterns that analysts focus on so-called seasonally-adjusted unemployment rates. Seasonally-adjusted unemployment rates are calculated using a statistical method that filters out the normal seasonal patterns. After all, we wouldn't want to confuse normal end-of-the-summer job losses with the beginning of a recession. Since it's typically driven by a combination of weather and holidays, there isn't much that government can do to reduce seasonal unemployment.

Structural unemployment exists because the skills possessed by job-seekers often don't match those desired by employers -- at least not in their current city. Job openings for plumbers can't be filled by barbers. Positions in the accounting department might require passing the CPA exam, which isn't an immediate option for a biology major. In addition, some economists consider geographic mis-matches to be a form of structural unemployment: Unless they're willing to move, unemployed workers in Alaska can't fill open positions in North Dakota. The good news is that structurally-unemployed workers who are willing-and-able to re-train or move can find jobs. The latest Census Bureau data (from 2015) estimates that about 19 million Americans are enrolled in college (Table 1) and another 3 million are taking vocational courses (Table 6). Similarly, according to the latest Census Bureau study, about 19% of all movers (almost 7 million people in 2013) moved for job-related reasons. The bad news, however, is that, in many cases, retraining is fairly impractical. Legal occupations (for example) have a June 2017 unemployment rate below 1%, but encouraging unemployed workers in the food-preparation-and-serving occupations (with an unemployment rate that's over 7%) to attend law school might not be very helpful.

While these three types of unemployment don't exactly equate to the concept of "natural unemployment," they become the starting point for the definition, since they are fairly stubborn to government policy and they aren't generally related to the overall state of the economy. In a future post, I'll take the next step by discussing what's known as the Phillips Curve.


Timothy S. Sullivan, Ph.D. is an Instructor in the Department of Economics & Finance and the Director of the Office of Regional Economic Analysis in the School of Business at Southern Illinois University Edwardsville. He can be reached at tsulliv@siue.edu.

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