Understanding the Main Types of Unemployment

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Understanding the Main Types of Unemployment

You’ve probably heard unemployment rates talked about often in the news, especially recently, as the COVID-19 pandemic brought the economy to a halt, and tens of millions of Americans ended up without work. Many people also have personal experience with unemployment, whether because they lost a job themselves or someone close to them has. 

Economists distinguish between a few distinct types of unemployment when looking at a nation as a whole: the main types of unemployment are cyclical, frictional, and structural. Additionally, many workers experience underemployment, another important measure to be aware of. We’ll explain how each of these works, along with a few different kinds of unemployment below. 

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Or, read through for a top-to-bottom explanation of different types of unemployment in economics.  

What is unemployment?

Unemployment occurs when a worker who is willing and able to work is unable to find a job. Unemployment figures can vary depending on the criteria researchers use to define it. However, generally speaking, unemployment numbers exclude demographics like children under 18, retired people, and permanently disabled people who are unable to work. 

A similar phenomenon, underemployment, occurs when people do have work, but the work does not pay enough to make ends meet. It can also happen when a worker’s skill set is not fully used by the job they currently have. 

Unemployment is a broad category that encompasses many different situations. What are the types of unemployment that economists—and workers—care about? Let’s take a look at that now. 

What are the types of unemployment?

There are many different types of unemployment in economics that experts and workers might be interested in. However, there are 3 types of unemployment that are most prominent. 

Frictional unemployment is common. It occurs naturally whenever someone is between jobs, has just graduated from high school or college and is looking for work, or is re-entering the labor force. Because there are always people looking for new jobs, there is always some level of frictional unemployment that gets factored into unemployment numbers. For that reason, many economists consider frictional unemployment to be the least worrying type of unemployment. 

This type of unemployment happens due to the fluctuating nature of the market. During periods of economic growth, there is often more money in people’s hands. This includes employers who are able to hire more employees. When the economy is in a downturn or recession, employers struggle and often have to lay off some employees. 

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The government can help reduce the damage caused by cyclical unemployment through public policy interventions. For instance, the Federal Reserve can cut interest rates, making it cheaper for banks and businesses to borrow money. This can stimulate the economy and help employers hold on to employees while the economy is in a downturn. 

When the labor force is not adequately trained for the jobs that are currently available, people face structural unemployment. For example, if major cities adopt more forms of public transit or electric self-driving vehicles in the future, traditional auto mechanics might face a period of structural unemployment. 

Structural unemployment can be particularly concerning, as retraining workers is expensive, and in the meantime, many previously employed workers now must rely on government assistance programs in order to make ends meet. 

Other types of unemployment

In addition to these 3 types of unemployment most often focused on, there are other types of unemployment that you might encounter or experience: 

• Regional unemployment: This occurs when an industry moves out of an area, or some other localized condition causes unemployment. 
• Seasonal unemployment: Some jobs only exist during some parts of the year. For example, ski instructors might face seasonal unemployment during the warmer months. 
• Voluntary unemployment: People might be voluntarily unemployed if they are making enough money from other sources, such as a spouse, inheritance, or investments. 
• Classical unemployment: Classical unemployment occurs when the rate of wages is too high for employers to afford, so there is a surplus of unemployed labor. 

Underemployment

Another factor to consider is underemployment. As previously mentioned, this occurs when workers have jobs, but these jobs pay below a living wage or do not fully utilize the worker’s skill level. Underemployment can occur due to a number of factors, such as the market under-valuing labor. It might also occur alongside the 3 types of unemployment mentioned above. 

Underemployment can be a difficult problem for economists and policymakers (as well as for workers) because, though it may seem that the unemployment numbers are low, the actual unemployment numbers may, in fact, be much higher when underemployed workers are factored in. In some cases, even workers who have a full-time job might be unable to make ends meet due to the inflated cost of living in some cities and a minimum wage that is too low. 

This means that, while unemployment numbers can be a useful metric to understand how well the economy is doing, it often requires looking into further factors to understand the situation better. It may seem that unemployment is low, but if many workers are underemployed, that low unemployment can be misleading. 

Unemployment classifications of people affected by COVID-19

People affected by the COVID-19 recession may be experiencing unemployment. As many as 15% of Americans were laid off when the recession hit; half of that total was still unemployed as of Fall 2020. Because this is such an extraordinary event, it can be hard to say what type of unemployment this would fall under, though it could be a form of cyclical unemployment due to the fact that an economic recession brought it on. 

Unemployment benefits

In order to combat the worst personal effects of unemployment, no matter what kind it is, state governments implement unemployment insurance programs. These programs usually require workers to pay a portion of their monthly earnings into the administration; then, they have the right to claim benefits if they are laid off. It’s a form of socially-funded insurance that protects people from financial hardship if they are laid off.

While workers might experience any of the kinds of unemployment listed above, the good news is that it doesn’t matter when it comes to getting connected with sources of aid. The bad news is that, as of Fall 2020, the government has not passed any new stimulus packages for COVID-19 economic relief. However, individual states still administer their regular unemployment insurance benefits. Be sure to find your local state’s unemployment administration and apply for benefits as soon as you can to protect your personal financial wellbeing. 

Unemployment insurance usually only lasts for a few months, so it’s important to focus on finding a new job or another source of income while you are living on benefits. Reassessing your finances after a job loss can be challenging, but it’s important to remember that you have resources available to you.

Types of unemployment: the key takeaways

Here’s a quick review of what was explained in this article. 

• There are 3 types of unemployment that economists focus on most often:
  • Frictional unemployment: the natural unemployment people experience when they’re between jobs. 
  • Cyclical unemployment: when the economy is doing well, more jobs are created; when it’s in a downturn, many people wind up being laid off. 
  • Structural unemployment: sometimes, the jobs that are available require different skills from those that the workforce has been trained in — this is a bigger problem. 
• In addition to unemployment, underemployment is an important metric to understand as well. This occurs when people work in jobs below their skill level, or when the market under-values workers’ labo, making them unable to make ends meet, despite working full time. 
• People whose livelihoods were impacted by the COVID-19 pandemic may be experiencing a form of cyclical unemployment — however, it’s important to note that these are extraordinary circumstances. 
• Luckily, unemployment benefits are usually available to laid-off workers regardless of the form of unemployment they might be experiencing. 
  • You can apply for unemployment benefits through your local state’s unemployment administration. 

Whatever type of unemployment you might be experiencing, it’s important to get a handle on your personal finances. One way to do that is by starting a budget. You can use the Mint app to get started making a monthly spending plan, assessing your different financial accounts, and managing outstanding debts — all in one convenient place. 

Sources

Pew Social Trends | Bureau of Labor Statistics | LISEP | Brookings | Benefits.gov

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