Employment / Unemployment
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The Economist explains ... The three types of unemployment

Burgess COMMENTARY

Peter Burgess

The Economist explains The three types of unemployment Aug 17th 2014, 23:50 BY C.W. Timekeeper DURING the recent downturn, the unemployment rate in America jumped from 4.4% to 10%. Economic growth has since pepped up. But unemployment is nowhere near pre-crisis lows: America’s rate, at 6.2%, is still 40% higher than late 2006. Economists are raising the spectre of “structural” unemployment to explain this puzzle. What is it?

Economists often refer to three types of unemployment: 'frictional', 'cyclical' and 'structural'. Cold-hearted economists are not too worried about the first two, which refer to people moving between jobs and those temporarily laid-off during a downturn. The third kind refers to people who are excluded—perhaps permanently—from the labour market. In econo-speak, structural unemployment refers to the mismatch between the number of people looking for jobs and the number of jobs available. It is bad news both for those who suffer from it and for the society in which they live. People out of work for long periods tend to have poorer health than average. The structurally unemployed also squeeze social-security budgets.

Structural unemployment in advanced economies has been rising for decades, as jobs in industries like mining and manufacturing have withered. In Britain between 1984 and 1992, employment in coal mining fell by 77% and in steelmaking by 72%. Communities that were built around a single profession were devastated. Many of the people affected only had experience of a specific, high-skill job. They did not have the skills or attributes needed to be successful in many service-sector jobs (such as working in a call centre or in a restaurant). Hence they were structurally unemployed. A different problem may be afflicting advanced economies today. The downturn was truly nasty and has lasted for years. Many people gave up looking for a job and withdrew from the labour force. In America the number of these “discouraged workers” jumped from 370,000 in 2007 to 1.2m in 2010. (Today it is twice its 2007 level.) Those who have been unemployed for more than a year are only one-third as likely to find a job as those unemployed for fewer than six months: employers believe that those unemployed for shorter periods of time are more motivated and skilled. Long-term unemployment can thus turn into structural unemployment.

But structural unemployment is not simply a product of economic busts. Karl Marx (who considered himself an economist) referred to a “reserve army of labour”. Marx argued that capitalism depended on people being out of work. The jobless, clamouring for employment, would ensure that workers were too scared to push for wage rises. Capitalists relied on the unemployed to keep their costs down. Marx exaggerated, though most economists would accept that a certain level of unemployment is inevitable: an attempt to achieve full employment would stoke massive wage inflation. Whatever its causes, governments have to understand structural unemployment. Economic growth alone will not be enough to get everyone into work. Supply-side reforms, such as job training (known by wonks as “active labour market policies”) are also needed.

Dig deeper: The impact of downturns on mind and body (August 2013) The labour market in America has suffered permanent harm (Feb 2014) A significant proportion of unemployment is probably cyclical (May 2012)