Five different but overlapping forces generate five types of unemployment: frictional, seasonal, structural, cyclical, and induced. Each poses somewhat unique problems for government policy.

Frictional Unemployment

            People enter or reenter the work force, are fired or permanently laid off, or voluntarily quit one job to look for another. Both firms and workers expend resources trying to match job applicants with job openings. Information about job openings and applicants is far from perfect, and mobility (e.g., relocating an employee or moving to get a job) is costly.

Frictional unemployment arises from transaction costs incurred in matching workers with jobs.

 

            In a narrow sense, almost all unemployment is frictional. Suppose transaction costs were zero. Every potential worker would know about all possible jobs, and every firm would know about all potential workers. Moreover, mobility would be costless and instantaneous. In such a world, people willing and able to work could instantly move into the (relatively) best jobs available to them, and firms could instantly fill every available job with the worker having the greatest comparative advantage in that job. The fit between workers and jobs would be optimal.

 

            However, it actually takes time for workers to move between jobs, and for firms to find suitable employees. Thus, many economists refer to frictional unemployment as search unemployment. Search processes can be viewed as investments in information. Workers search for satisfying and remunerative employment, sometimes turning down several jobs before finding a position that suits them. They will continue to look for a better job until the expected marginal benefits from further search (e.g., higher wage offers) no longer exceed their expected marginal costs (wages forgone while looking).

 

            Similarly, firms search for workers with skills honed to accomplish the work required until the firms' marginal benefits (better workers or lower wages) no longer exceed their marginal costs (e.g., forgone output and profit). Firms may make many job offers before finding someone acceptable who agrees to fill a job. (Most fast-food restaurants post semi-permanent HELP WANTED signs.) Unemployed workers often offer their labor dozens of times before landing an acceptable job. Thus, frictional unemployment is an unavoidable by-product of normal economic activity. Unemployment rates naturally rise as the average duration of search increases.

 

            The existence of frictional unemployment implies that a target of zero unemployment would be neither reasonable nor desirable. Zero unemployment would freeze all workers in their current jobs, no matter how unsatisfactory. And firms would be stuck with their current workers, no matter how bad the mismatch. In fact, the employed and unemployed both experience considerable turnover—-a term used when workers change jobs. For example, employment in 1993 averaged nearly 120 million persons per month, but about 130 million different persons worked at some time during the year. While unemployment averaged around 8.7 million per month, nearly 30 million people were unemployed at some time during those 12 months.

 

Seasonal Unemployment

Vacations, football, tomato harvests, and holidays are seasonal activities. Seasonal unemployment also varies systematically over the year. For example, most lifeguards are only employed during the summer months, and department store Santas work only a few weeks annually. Economic data published for activities that vary regularly over the year, including unemployment, must be seasonally adjusted to make them comparable.

Seasonal unemployment varies systematically over the year.

            Weather, for example, operates from the demand side to drive employment patterns in agriculture and construction.  Beach towns and ski resorts also experience seasonal swings in employment. Seasonal influences emerge on the supply side as well. School vacations are the major reason that teenage unemployment rises in June and falls in September.

 

Structural Unemployment

            Some individuals lack significant marketable skills, a barrier that makes finding work an ordeal in even the best of times.

Structural unemployment occurs when a worker's skills fail to match the requirements of virtually any job opening.

            Why are people who are structurally unemployed usually jobless for long periods? First, structural change displaces some workers. For example, technological innovation may make certain skills obsolete. Many typesetters and specialists in cut-and-paste layout work lost their jobs with the advent of computerized typesetting and desktop publishing. In the past decade, corporate restructuring left many middle-aged middle managers jobless for extended periods. Second, some people, including many high school drop-outs and most ex-convicts, have acquired few, if any, marketable job skills through either education or previously employment. Firms may find it unprofitable to hire and train workers if expected training costs outweigh benefits to the firm. This is especially a problem if employees frequently find better jobs after being trained.

 

Cyclical Unemployment

Employment and output both rise during economic booms and decline during downturns.

Cyclical unemployment coincides with downturns in business cycles.

            Marginal firms are especially vulnerable to recessions, pushing up unemployment rates. Figure 6 shows that  joblessness has varied enormously over the past century. These swings are dominated by cyclical unemployment, a major target of macroeconomic policy.

 

Figure 6   Sources: 1900–1928 derived from S. Lebergott, Manpower and Economic Growth (NY: McGraw-Hill, 1974); 1929–1993 derived from the Bureau of Labor Statistics and Economic Report of the President, various issues, 1970-1994.

 

            Unless your family or friends are affected directly, unemployment may seem fairly abstract. Not all groups of workers are affected in the same way by a cyclical downturn. Table 2 shows unemployment rates for specific groups during selected periods of high and low employment. Historically, cyclical

unemployment bore most heavily on manufacturing and construction workers. Until recently, professional and technical workers were less severely affected. However, during the Recession of 1990-1991, professional, technical, and middle managerial personnel were hit far more heavily than in prior recessions.

Table 2   Unemployment Patterns during Periods of Prosperity and Recession
	1973 Peak	1975 Trough	1981 Peak	1983 Trough	1988 Peak	1991 Trough
Total unemployment   (all occupations)	4.9	8.5	7.6	9.8
Professional and technical	2.2	3.2	2.8	3.3
Government	2.7	4.1	4.7	4.9
Service	5.80	8.60	8.90	10.60
Blue-collar	6.2	14.7	12.2	17.7
Manufacturing	4.4	10.9	8.3	12.3
Construction	8.9	18.0	15.6	20.0
Source: U.S. Department of Labor, Monthly Labor Review, 1994.

 

Induced Unemployment

            Finally, certain government policies may induce unemployment. Minimum-wage laws, for example, overprice the labor of unskilled and inexperienced workers and limit job opportunities. Laws requiring wages at the union scale on government contracts also hinder full employment— they leave workers unemployed who would be willing to work for less on government contracts. And unemployment compensation provides incentives for people who sincerely desire work to turn down some job offers in hopes that they will find the perfect position if they keep looking.