At any given time, a nation will always have people who are unemployed; it is impossible for a nation to have a 100% full employment. (You’ll understand why as you read on.) Not all of these people are unemployed for the same reason, so economists have developed three categories to organize the different types of people who are unemployed.
Frictional Unemployment
The term frictional unemployment comes from the fact that the labor market isn't perfect, so at any given time, there will be a mismatch of job types and people looking for those jobs. So people who are between jobs (they could have been laid off, their contract may have ended, or maybe they’re just looking for a change in job scenes) are considered to be frictionally unemployed. Note that you must be looking for a job in order to be considered frictionally unemployed; if you get fired and decided not to look for a job, you’re not fictionally unemployed, you’re just being lazy (unless you can support yourself off of your current savings, which is all together a different story). Frictional unemployment also takes into account seasonal workers, people who are employed only part of the year due to the weather changes in certain season. Depending on the location, construction workers could be a type of people who are frictionally unemployed (it’s awful hard to build a building in the middle of a lightning storm).
Structural Unemployment
Structural Unemployment describes the people who become unemployed due to changes in changes in technology or consumer demand for a certain product. Take for example, the VCR player. Back in the 90’s the VCR was the pinnacle in recording technology; video rental stores exploded into business overnight because of the popularity of the VCR and its tapes. However, with the introduction of the DVD player, people quickly abandoned the VCR. People who were in factories manufacturing VCRs suddenly found themselves without a job. If nobody wanted a VCR, then people who owned and ran video rental stores also quickly found themselves out of business; consumers didn't want to rent tapes anymore, they wanted to borrow DVDs. The loss of a manufacturing job represents structural unemployment because DVD technology rendered the VCR obsolete. People who found themselves out of a job or business due to lack of video rentals are also considered to be structurally unemployed because nobody wanted to rent tapes, consumers wanted to rent DVD disks. Also, people who have skills that are no longer useful or that could be replaced with a machine could be structurally unemployed. One of the most famous examples of this is bank tellers. Before the invention of the ATM, for those of us who can remember, the only way to get your money in and out of a bank was by walking into a branch and interacting with a live person. The ATM changed all of that, since now you could just walk up to one in your local grocery store or pull up to your ATM drive through at your bank. You technically wouldn't ever have to interact with a bank teller again after setting up your account, and even then you might not have to, since more and more banks are offering the ability to open accounts online. (There’s actually a term for the kind of advances in technology and services that leads to the abandonment of old technology and services: creative destruction. One of these days, when I find the time, I’ll write about that in another post.)
Note: A person doesn't have to fit neatly into any single one of these categories; he or she could be in more than one or part of one and part of another. There are some situations where a person’s unemployment description fits the frictionally unemployment category as well as the structural unemployment category. The line between frictional and structural isn't actually all that clear, but some people describe the difference to be in a person’s skill set. People that are frictionally unemployed have skills that are still in demand, and if needed, they could relocate and find a new job. A person who’s structurally unemployed may be a bit more out of luck as he or she would have to be educated and trained with a new set of skills that are in demand by employers.
Cyclical Unemployment
This is the type of unemployment that many people are experiencing today. People who are cyclically unemployed are the ones who get laid off from their jobs due to a failing economy. Cyclical unemployment is the result of a lack of demand for products; when people stop buying things, employers don’t’ have any money to pay their workers and thus, they have to lay them off. Cyclical unemployment gets its name from the business cycle, which has four phases, a peak, a recession, a trough, and an expansion. From there, it just repeats. All businesses, and nations for this matter, go through this cycle. (The cycle is unavoidable, but effect, impact, and result of it can be altered and managed. This is something that’ll be covered in another post since the explanation is far too long for this one.) Cyclical unemployment begins occurring at the start of a recession and generally ends at some point in the expansion phase.
Full Employment
As you've read through the unemployment descriptions, you may have figured out why its impossible to have an economy that’s 100% employed. If not, here’s why: it’s due to frictional and structural unemployment. People will always be quitting their old jobs in search of a better one, and the moron who sits three cubicles down from you who does nothing will always be fired. In other words, people will always be in search of new jobs due to a lack of satisfaction from their current one, or they could be employed seasonally and are waiting for their job to be available again. Combine this with the fact that technology is constantly changing, leaving people structurally unemployed left and right (also keep in mind that it takes time for people to educate themselves with a new skill that is in demand), and you've got your reason as to why nations will never truly reach full employment.
However, from time to time, you’ll hear economist refer to an economy as being fully employed. When they say this, they mean that the economy has no cyclical unemployment (the only one that could be avoided). In other words, a “fully employed” economy is one that is only experiencing frictional and structural unemployment.
And there you have it ladies and gents, a general economic overview of what unemployment is.
If you missed it, here's the link to last week's Macro Econ Mondays post: Unemployment Part 1 - How Unemployment is Measured.
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