The national unemployment rate dipped to 3.8 percent in 2018, according to the Bureau of Labor Statistics. While employment increased in professional and business services, health care and wholesale trade, it decreased in construction — and it's still one of the worst unemployment rates in history.
But what does this all mean? What does an official unemployment rate mean to the civilian labor force? What makes up the natural rate of unemployment? What do these rates mean for the labor market? And what types of unemployment go into these numbers?
When it comes to understanding unemployment rates and what they mean, it’s important to understand the three main types of unemployment that hit the labor market. These three types include the following.
- Structural unemployment
- Frictional unemployment
- Cyclical unemployment
These three types of unemployment are what make up the unemployment rate the U.S. Bureau of Labor and Statistics releases every month. These stats take into consideration the unemployed labor force in the country at any given time. Some of these are beneficial for the economy, while others discourage workers and tent to lead towards long-term unemployment.
What Are the 3 Different Types of Unemployment?
1. Structural Unemployment
Structural unemployment occurs when there is a shift in the economy and the skills it demands from its workforce. This type of involuntary unemployment is often the cause of a long or impending recession. It occurs when employers lay off a massive amount of workers that can’t learn new skills or adapt to new technology in the workforce. Structural unemployment is a sign of a failing economy. Because employees don’t have the new skills needed, they get laid off. And if they can’t learn new skills, their old skills become outdated. This makes it even harder to get back into the workforce which means that it’s likely their unemployment will become a long-term problem, leading to recession.
Examples of structural unemployment in the workforce can be seen in the newspaper industry when advertising moves digital, meaning those with print newspaper skills are left out of the new skills required for online journalism. Another example is when organizations bring in machines and robots to replace workers. Those workers who previously had those jobs now must learn new skills to operate these machines, or get fired. These unemployed individuals often have to work even harder to reenter the civilian labor force.
2. Frictional Unemployment
Frictional unemployment is when people leave the labor force in search of a new job, but do not yet have one. This is usually a short-term form of voluntary unemployment. Most times, it’s when employees leave without being fired, when students leave college and enter the workforce for their first, full-time work, or when unemployed workers re-enter the workforce after being laid off for business purposes or come back from maternity or disability leave.
This type of voluntary unemployment is natural and actually benefits the economy. There is no way to avoid this type of unemployment as all employees will inevitably leave and seek out new opportunities. Frictional unemployment is good for the economy and means that the economy is functioning effectively with benefits for all.
3. Cyclical Unemployment
Cyclical unemployment is the third type of unemployment. This type, however, doesn’t directly affect or go into the consideration of the national unemployment rate. This type of involuntary unemployment isn’t a natural part of the entire unemployment cycle because it’s related to the business cycle of supply and demand.
When the demand for a certain product or service falls, supply is forced to fall as well. This causes massive layoffs to offset the discrepancy between what is being bought and the labor that goes into creating it. This tends to kickstart a downward spiral. Because now those that have been laid off have less money to spend, so less money is going back into the economy. This lowers demand, which means even more layoffs by employers. Cyclical unemployment often leads to even more unemployment, making it very detrimental. To turn this around, the government is often times expected to step in. in fact, in most cases it is required that they step in to stop the cycle from continuing.
Understanding the natural rate of unemployment and its effect on long-term unemployment, long-run economic growth, unemployed workers, full-time work, and part-time workers can easily be boiled down into understanding three types of unemployment. And these three types of unemployment have positive and negative effects on the economy. But knowing what they are and how they work will help you understand the world around you in no time.