Unemployment exists in every economy around the world. In the US there are three main types of unemployment: structural, frictional, and cyclical. The first two make up what is known as the natural unemployment rate. The third rises when demand falls, usually during recession. Typically there is a combination of all three rates affecting the overall unemployment in an economic and labor market at any given time.
There will always be some level of unemployment no matter what type of economy we are experiencing - healthy or not. Although we are currently experiencing the lowest unemployment rates in decades – the actual lowest level of unemployment was 2.5% right after the Korean War. The highest level of unemployment was experienced during the great depression at 25%.
A healthy indication of the labor market and considered natural employment is a rate between 4.5 to 5%. We are currently running at a rate of 3.7% - which means there are more open jobs than eligible workers.
Here is a quick breakdown of the three main types of unemployment:
Frictional unemployment occurs when workers leave their current jobs without a new job to go to - taking time off to find new employment opportunities. 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 workforce. It also happens 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.
Structural unemployment exists when shifts occur in the economy that creates a mismatch between the skills workers have and the skills needed by employers.
An example of this is an industry’s replacement of machinery workers with automation and new technologies. Workers now need to learn new skill sets to be able to operate the automation and new technologies that replaced them. Those that don't learn need retraining for other jobs or face long-term structural unemployment.
A long recession often creates structural unemployment. If workers stay unemployed for too long, their skills have likely become outdated. Unless they are willing and able to take a lower-level, unskilled job, they may stay unemployed even when the economy recovers. If this happens, structural unemployment leads to a higher rate of natural unemployment.
Cyclical unemployment is not part of the natural unemployment rate. It's caused by the expansion or contraction phases of the business cycle.
An example of Cyclical unemployment is when the demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs.
Cyclical unemployment tends to create the most unemployment. This is because the laid-off workers have less money to buy the goods and services they need, further lowering demand.
There are other forms of unemployment measures including: Long-Term, Real, Seasonal, Classical, and Underemployment rates. But these main three are the ones to know, understand, and keep track of in these economic times.
Economists use unemployment data as an economic indicator to assess the health of an economy. So should we as talent acquisition leaders – the more we understand the unemployment levels and reasons why they are what they are - then the more we can adjust and customize our approach to attracting the talent we need to fill our open jobs.