LOS c: Explain the types of unemployment, full employment, the natural rate of unemployment, and the relation between unemployment and real GDP.

Structural unemployment is due to structural changes in the economy that eliminate some jobs while generating job openings for which unemployed workers are not qualified. Cyclical unemployment results from short-term deviations from "full employment."

 

The natural rate of unemployment exists when the economy operates at full employment. At full employment, cyclical unemployment is zero.

Frictional unemployment exists because workers and employers do not have perfect information and must expend time and resources on search activities.

The economy is said to be operating at full employment when cyclical unemployment is zero. Structural and/or frictional unemployment may still exist, but the economy may still be said to be at full employment.

Structural unemployment is due to structural changes in the economy that eliminate some jobs while generating job openings for which unemployed workers are not qualified. Cyclical unemployment is when the economy is operating at less than full capacity.

Unemployment can be divided into frictional, cyclical, or structural unemployment.

There are only three types of unemployment: frictional, cyclical, and structural.

• Frictional unemployment is due to constant changes in the economy that prevent qualified workers from being immediately matched with existing job openings.
• Cyclical unemployment is when the economy is operating at less than full capacity.
• Structural unemployment is due to structural changes in the economy that eliminate some jobs while generating job openings for which unemployed workers are not qualified.
  

When the economy is operating at less than full capacity, positive levels of cyclical unemployment will be present. At levels above full capacity negative cyclical unemployment will exist.

Frictional unemployment will prevent qualified workers from being immediately matched with existing job openings. Two causes are imperfect information and the job search conducted by both employers and employees.

Cyclical unemployment is caused by a change in the general level of economic productivity and occurs when the economy is not operating at full employment. Like a recession, cyclical unemployment is a short-run phenomenon. Frictional and structural unemployment exist even when the economy is operating a full employment, and thus are considered long-run types of unemployment.

The sum of the frictional and structural unemployment rates is called the natural rate of unemployment. Unemployment is at its natural rate when the rate of cyclical unemployment is zero.

When real GDP falls below potential GDP, cyclical unemployment increases. When real GDP increases, cyclical unemployment decreases. Structural unemployment arises from a mismatch of employer needs and workers’ skills and is not directly related to cyclical changes in GDP growth.

Cyclical unemployment is unemployment caused by a change in the general level of economic productivity. When cyclical unemployment is zero, the economy is said to be operating at full employment.

Note: When the economy is operating at less than full capacity, positive levels of cyclical unemployment will be present. At levels above full capacity, negative cyclical unemployment will exist.

The natural rate of unemployment is that rate of unemployment present when the economy is at its full employment rate of production or output. At full employment, both structural and frictional unemployment still exist. Therefore, there is some level of unemployment, and the natural rate of unemployment is not equal to zero.

The “number unemployed divided by the number in the labor force” is the definition of the rate of unemployment. There is no magical number or parameter that indicates full employment.

Full employment is reached when cyclical unemployment is zero.