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Types of Unemployment

The 3 types you need to know, and a whole lot more

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There are three main types of unemployment: structural, frictional and cyclical. The first two make up the natural unemployment rate, while the third rises when demand falls, usually during a recession. Some economists include as many as five types of unemployment, such as seasonal and classical. See how this worked in U.S. history in Unemployment by Year.

Here's the different types of unemployment with links to more detailed articles so you can be sure to tell them apart. Also, find out how unemployment is measured, and why some experts say it doesn't capture the real unemployment rate.

1. How Unemployment Is Defined

Unemployed worker
The jobless must look for work to be counted as unemployed. (Photo by Chris Hondros/Getty Images)
Before you can find out about the different types of unemployment, make sure you understand precisely how unemployment is defined and measured by the Bureau of Labor Statistics. To be counted as unemployed, out of work employees must have these three qualities:
  1. They aren't working, even part-time or temporary.
  2. They are available to work.
  3. They actively looked for work in the past four weeks,
This last point is important, and often controversial. If someone has stopped looking for work, the BLS no longer counts them as being part of the labor force, or as unemployed. However, the BLS does report them separately under the category of "marginally attached to the labor force," so you can get a sense of what unemployment would be if they were counted.

To get the unemployment rate, divide the number of unemployed by the number in the labor force.

2. Natural Unemployment

Natural unemployment
Some unemployment is natural, even in a healthy economy. (Photo: Tom Boyle/Getty)
There will always be some natural level of unemployment, even in a healthy economy. The lowest level of unemployment was 2.5%, right after the Korean War. In fact, this was an economic bubble that soon led to a recession. That's why some level of natural unemployment, usually around 4%, is actually a healthy indicator. Natural unemployment is caused by two of the three main types of unemployment: frictional and structural.

3. Structural Unemployment

structural unemployment
Robots cause structural unemployment among factory workers. (Photo: Bill Pugliano/Getty Images)
Structural unemployment is when shifts occur in the economy that create a mis-match between the skills workers have and the skills needed by employers. An example is when an industry fires machinery works and replaces them with robots. The workers need to learn how to manage the robots that replaced them. Those that don't must be retrained for other jobs, or face long-term structural unemployment.

A long recession can create structural unemployment. If workers are unemployed for too long, their skills can become outdated. Unless they are willing and able to take a lower-level, unskilled job, they may stay unemployed even when the economy recovers. In this way, structural unemployment can lead to a higher rate of natural unemployment. 

4. Frictional Unemployment

frictional unemployment
Frictional unemployment occurs while finding a new job. (Photo: John Moore/Getty Images)
Frictional unemployment is when workers leave their old jobs but haven't yet found new ones. Most of the time workers leave voluntarily, either because they need to move, or they've saved up enough money to allow them to look for a better job. Frictional unemployment also occurs when students are looking for that first job, or when mothers are returning to the work force. Frictional unemployment also occurs when workers are fired or, in some cases, laid off due to business-specific reasons, such as a plant closure. Frictional unemployment is short-term and a natural part of the job search process. In fact, frictional unemployment is good for the economy, as it allows workers to move to jobs where they can be more productive.

5. Cyclical Unemployment

cyclical unemployment
Soup lines. (Photo: Library of Congress, Prints & Photographs Division, FSA-OWI Collection)
Cyclical unemployment is not part of the natural unemployment rate. It's strictly caused by the contraction phase of the business cycle. Demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs. Cyclical unemployment can usually creates more unemployment, because the laid off workers now have less money to buy the things they need, further lowering demand. Government intervention, in the form of expansive monetary policy and even fiscal policy, is usually required to stop the downward spiral. After the stock market crash of 1929, the government did not step in right away. This led to the Great Depression, which lasted 10 years and led to a 25% unemployment rate.

6. Long-Term Unemployment

unemployed-on-stairs.jpg
After looking for a job for six months, it's hard not to give up. (Photo: PeskyMonkey/Getty Images)

Long-term unemployment occurs for those actively looking for a job for 27 weeks or more - basically six months. The effects are devastating. Many employers overlook someone who's been looking for that long. The emotional and financial costs can be very damaging.  Sadly, a higher percent of the unemployed fall into this category than before the crisis, or in prior recessions.

7. Seasonal Unemployment

Seasonal unemployment
After harvest season, farm workers become seasonally unemployed. (Photo: Bill Green/Getty Images)
Some sources include seasonal unemployment as a fourth type of unemployment. It is part of natural unemployment. Like its name says, seasonal unemployment results from regular changes in the season. Workers who may be affected by seasonal unemployment include resort workers, ski instructors and ice cream vendors. It could also include people who harvest crops. Construction workers are laid off in the winter, in most parts of the country. School employees can also be considered seasonal workers.

The BLS does not measure seasonal unemployment. Instead, it adjusts its unemployment estimates to rule out seasonal factors. This gives a more accurate estimate of the unemployment rate.

8. Classical Unemployment

classical unemployment
Classical unemployment results from artificially high wages.(Photo: Chris Hondros/Getty Images)
Classical unemployment, also known as real wage unemployment or induced unemployment, is when wages are higher than the laws of supply and demand would normally dictate. It usually occurs in three situations:
  1. Unions negotiate higher salaries and benefits.
  2. Long-term contracts set a wage that may wind up being too high if there is a recession and everyone else's salary falls.
  3. The government sets a minimum wage.
The result is that companies must pay more per employee, so they can afford fewer employees. Those that are laid off are victims of classical unemployment.

9. Real Unemployment

real unemployment
The real unemployment rate includes some part-time workers.(Photo: Tim Boyle/Getty Images)
Real unemployment is not one of the types of unemployment, yet it's a term you need to understand. Many people argue that the real unemployment rate should include any jobless person who wants a full-time job. They say the BLS should count all these people in the unemployment figures. If it did, the BLS would include these three categories:
  1. Marginally attached -- people who haven't looked for work in the past four weeks, but have looked within the past year. This category also includes:
  2. Discouraged workers -- people who have given up looking for work.
  3. Part-time workers who would like a full-time job.
These expert argue that, if the BLS included these categories, the real unemployment rate would be at 25% -- the same as during the Great Depression.

10. Underemployment

underemployed
Underemployed workers are usually underpaid. Photo: Getty Images
Underemployment is when workers have jobs, but they aren't working to their full capacity or skill level. This includes those who are working part-time, but would prefer full-time jobs, and those who are working in jobs where they aren't being utilized. Underemployment can be caused by cyclical unemployment. During a recession, unemployed workers will take what they can to make ends meet.

Some definitions of underemployment include unemployment. Others include segments of society that are not included in the BLS definition of unemployment, but are counted in the real unemployment rate. Therefore, an understanding of underemployment is helpful to really get the big picture when looking at different types of unemployment. Article updated June 11, 2013

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