Unemployment, the percentage of the labor force that are looking for work, has several causes, such as a change of the seasons for agriculture, weakening demand for a certain technology, or a recession. It is important for policymakers to know what these causes are so they can frame appropriate policies to deal with each kind of unemployment. In particular policymakers need to know which of the various types of unemployment are short-term in nature and which are long-term.
Frictional unemployment is unemployment of those who have just left their job, those who are coming back into the job market, and those who are in the process of obtaining a job for the first time. Frictional unemployment is a normal feature of a market economy in which workers move freely from job to job and need time to make the move. An example of frictional unemployment is a student who has graduated from college and is unemployed while looking for their first career-oriented job. Frictional unemployment is not a major social problem, and it can be reduced by improving job information so that job seekers can find jobs more easily. Although voters may wish that government officials they elect could reduce unemployment to zero, the existence of frictional unemployment makes this impossible. If unemployment falls below the estimated frictional rate, this indicates that the economy is overheating. Labor shortages in many sectors will constrain an overheating economy from expanding further.
Cyclical unemployment is unemployment that rises and falls as a result of the business cycle, so it is high in a recession and low in an expansion, or a boom. It a relatively short-term phenomenon. Minimizing cyclical unemployment is a major reason why policymakers strive to avoid recessions by deploying both fiscal and monetary policy to maintain the stable growth of national output. During a recession, a worker may be laid off from a factory manufacturing HD televisions because fewer consumers are buying this luxury item.
Seasonal unemployment is unemployment that occurs because the need for workers falls at certain times during the year. For example, unemployment in the United States tends to drop around the Christmas season because many retail businesses hire workers to support an increase in the number of shoppers and many stores extend their hours. Seasonal unemployment can have a major effect in regions that rely on tourism during certain times of the year, such as ski resorts or beachside areas.
Structural unemployment is unemployment caused by long-term changes in the structure of the economy, such as the rise and fall of particular industries. Dealing with structural unemployment requires long-term policies. For example, investment in infrastructure can provide jobs for people who are displaced from dying industries. Education and training can equip people to find employment in newly emerging sectors of the economy. Employees who assemble radios, for example, may be able to transfer their skills to assembling televisions. Technological unemployment is one form of structural unemployment, which is caused by processes such as mechanization and automation that displace workers: a car factory may become more automated, thus eliminating jobs.
Historically, predictions that technological progress would lead to permanent large-scale unemployment have proved false. Workers have adapted to major structural shifts, such as industrialization, by moving to jobs in new locations and new industries. It is not yet clear whether this ability to adapt will continue to be the case when automation and artificial intelligence are implemented across a wide swath of manufacturing and service occupations, as some long-term forecasts suggest will happen. Workers may need advanced education to do the new jobs that are created with technology. The lack of mutability of technological infrastructure also has an impact. This infrastructure does not adapt; instead, it must be rebuilt.