Types of Unemployment

Classification of unemployment: causes and characteristics
Unemployment is heterogeneous in its nature and causes. Understanding the different types of unemployment is critically important for assessing the state of the economy and the prospects of monetary policy. Each type of unemployment has its own consequences for inflation, wages, and corporate profits.

Frictional unemployment
Frictional unemployment arises in the process of the normal functioning of the labor market and is associated with searching for jobs and changing places of employment. Even in a perfectly functioning economy, it takes time for workers to find suitable vacancies, and for employers to find suitable candidates. Frictional unemployment includes: graduates of educational institutions searching for their first job; workers who voluntarily changed jobs; persons returning to the labor force after a break.
Frictional unemployment is inevitable and even desirable, as it reflects the flexibility of the labor market and the process of optimal allocation of labor resources. The duration of frictional unemployment is usually small — from several weeks to several months. The development of information technology, online recruiting, and social networks reduces job search time, potentially decreasing frictional unemployment.

Structural unemployment
Structural unemployment arises due to a mismatch between workers’ skills and qualifications and the requirements of existing vacancies. This mismatch may be geographical (jobs and workers are located in different regions), professional (other specialties are in demand), or qualification-related (a different education level is required).
The causes of structural unemployment include technological changes (automation, digitalization), shifts in demand structure (decline of some industries and growth of others), globalization (relocation of production to countries with cheap labor), institutional barriers (high minimum wage, strict labor legislation).
Structural unemployment is more persistent than frictional and can remain for a long time. Its reduction requires retraining workers, development of education, increasing labor force mobility, and reforming labor market institutions.

Cyclical unemployment
Cyclical unemployment is associated with fluctuations in economic activity and occurs during periods of recession, when aggregate demand falls below the potential level. When demand for goods and services declines, companies reduce production and lay off workers.
Cyclical unemployment is a component of unemployment that can be eliminated through macroeconomic policy. Stimulative monetary and fiscal policies can boost aggregate demand and reduce cyclical unemployment.
The magnitude of cyclical unemployment is measured as the difference between the actual level of unemployment and the natural rate of unemployment. Positive cyclical unemployment indicates a recessionary gap; negative — an overheated economy.

Seasonal unemployment
Seasonal unemployment arises due to regular fluctuations in demand for labor throughout the year. It is characteristic of agriculture, tourism, construction, and other industries with pronounced seasonality.
Statistical agencies usually publish unemployment data with seasonal adjustment to eliminate predictable seasonal fluctuations and reveal basic trends. Nonetheless, seasonal factors may affect individual sectors and regions.

Natural rate of unemployment
The natural rate of unemployment is the level of unemployment that exists with the normal functioning of the labor market, when the economy is in a state of long-term equilibrium. It includes frictional and structural unemployment, but does not include cyclical unemployment.
The natural rate of unemployment is not constant and changes over time under the influence of demographic, institutional, and technological factors. It differs between countries depending on labor market flexibility, social protection systems, and labor taxation.
The concept of NAIRU (Non-Accelerating Inflation Rate of Unemployment) is closely linked to the natural rate of unemployment. NAIRU is the unemployment level at which inflation is stable. If unemployment falls below NAIRU, pressure arises for wage growth and inflation. If unemployment is above NAIRU, inflation slows down.

Application for investors
Distinguishing between types of unemployment is critically important for assessing inflation risks. Cyclical unemployment can quickly decrease under stimulative policy, creating inflationary pressure. Structural unemployment is more persistent and does not create such pressure.
Estimating NAIRU helps predict actions of the central bank. If actual unemployment approaches NAIRU or falls below it, the probability of monetary policy tightening increases. This is negative for bonds and growth stocks.
Structural unemployment has sectoral implications. Industries losing workers due to structural shifts are likely to experience pressure on profits. Industries attracting workers may face shortages of qualified personnel and rising wages.