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Ask an Economist -- What are the similarities and differences between Natural Unemployment and Cyclical Unemployment?

Without straying too much into economic theory or technicalities, “natural unemployment” or the “natural rate of unemployment” refers to unemployment that exists even when labor supply and demand for labor are in balance, or equilibrium. You might say that natural employment is the unemployment that exists even when the economy is functioning at full employment. It has two main components: frictional and structural unemployment.

Frictional unemployment refers to workers who are temporarily without jobs and searching for new ones that are better suited to their skill sets and work preferences (schedule, pay levels, promotional prospects, location, satisfaction level, quality of work, etc.). Much of frictional unemployment is voluntary. Economists consider frictional unemployment to be healthy for an economy, as it should ultimately result in better matching a worker’s skills and qualities to those required of a job, thus boosting productivity. Some churning within the labor force is necessary in a growing or dynamic economy.

Structural unemployment refers to unemployment that occurs when a changing economy creates a mismatch between the skills and qualifications of workers looking for jobs and the jobs that are available. Structural unemployment is typically longer in duration and more devastating to an individual than frictional unemployment. For example, technological change in an economy may render an individual’s work skills obsolete, making it difficult for that individual to find suitable work or to qualify for available jobs. Similarly, workers in declining industries or who had jobs in industries that have left an area may find it difficult to retrain and qualify for available jobs and opportunities. Structural unemployment typically occurs because labor is less mobile than capital – it takes time and money to develop new skills and qualifications for jobs that are in demand, or to relocate to places where suitable jobs are available. A dynamic and changing economy, while creating opportunities, unfortunately leaves some workers behind.

In contrast, cyclical unemployment is associated with the business cycle. When the economy is doing well, demand for labor is typically strong, there is churning within the labor force (frictional unemployment), and new entrants and reentrants to the labor market have opportunities to find work. Unemployment falls. However, when the economy is doing poorly demand for goods and services falls and demand for labor falls. Many workers are laid off and become unemployed involuntarily, new entrants and reentrants into the labor force find it difficult to find work because there are few opportunities, and workers with jobs are more likely to hold onto the jobs they have instead of seeking new opportunities. Unemployment rises.

Finally, if you want a more theoretical discussion of the “natural rate of unemployment” and particularly, the relationship between unemployment and inflation, I suggest you do a quick Internet search via Google or some other search engine. Keywords such as “natural unemployment” or “natural rate of unemployment” should yield numerous results.

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