Types of unemployment
In the following table, determine what type of unemployment best describes each situation.
Structural Unemployment
Frictional Unemployment
Cyclical Unemployment
Charles quit his part-time job to search full time for a job that was more closely related to his education. Jamal was laid off as a teacher because of government budget cuts, made necessary by a fall in tax revenues caused by a recession. Rosa was a highly skilled instrument maker, but she hasn’t been able to find work in the field since her workshop closed due to competition from instrument makers in China.
Imagine an economy where the cyclical rate of unemployment is 5% and the natural rate of unemployment is 2.5%. In this economy the total rate of unemployment would be and the frictional rate of unemployment would be. (Select % if the rate cannot be determined from the information given.)
The Correct Answer and Explanation is:
Unemployment Types Table
| Person | Description | Type of Unemployment |
|---|---|---|
| Charles | Quit part-time job to find a more suitable job | Frictional Unemployment |
| Jamal | Laid off due to recession and fall in tax revenues | Cyclical Unemployment |
| Rosa | Lost job due to outsourcing and can’t find similar work | Structural Unemployment |
Unemployment Rate Question
- Cyclical unemployment rate: 5%
- Natural rate of unemployment: 2.5%
- The natural rate includes frictional + structural unemployment.
- Therefore, total unemployment rate = natural rate + cyclical rate
→ Total unemployment = 2.5% + 5% = 7.5% - Since the natural rate = 2.5%, and we don’t know the breakdown of frictional vs structural within that 2.5%,
→ Frictional unemployment rate = Cannot be determined from the information given.
Explanation
Unemployment is classified into different types based on the underlying causes. The three most commonly identified types are frictional, cyclical, and structural unemployment.
Frictional unemployment occurs when individuals are temporarily between jobs or are entering the labor market for the first time. This is a normal part of a healthy economy and typically includes people who voluntarily leave one job to find another that better suits their skills or preferences. In the case of Charles, who left his part-time job to seek a position more aligned with his qualifications, this is a clear example of frictional unemployment.
Cyclical unemployment is caused by downturns in the business cycle—typically during a recession—when demand for goods and services falls, leading to job losses. Jamal, a teacher laid off due to budget cuts triggered by a fall in tax revenues during a recession, exemplifies cyclical unemployment.
Structural unemployment happens when there is a mismatch between the skills of workers and the demands of the labor market. It often results from technological changes, globalization, or shifts in consumer demand. Rosa’s inability to find work after her workshop closed due to foreign competition reflects structural unemployment, as her skills are no longer in demand locally.
In the second part, we’re told that the cyclical unemployment rate is 5% and the natural rate is 2.5%, which is made up of both structural and frictional unemployment. Thus, the total unemployment rate is 7.5%. However, without more detail, we cannot determine exactly how much of the 2.5% natural rate is frictional, so the frictional unemployment rate cannot be determined from the given data.
