It may seem counterintuitive, but some forms of unemployment are good from an economy-wide perspective. Macroeconomists can measure and forecast the ideal unemployment rate for any given quarter based on structural characteristics of the economy at that time. Right now, the natural rate of employment rests just below 4.5%.

To understand why the natural rate of unemployment rests around 4%, one must identify the forms of unemployment that occur in a healthy economy and the forms that indicate a recession.  Economists identify two main types of unemployment: voluntary and involuntary.

Voluntary unemployment is when a worker chooses to leave their job, thus going into unemployment voluntarily. Voluntary unemployment can be frictional or seasonal. 

• John Maynard Keynes, the progenitor of modern economics, defined frictional unemployment as the unemployment that occurs as the result of a worker quitting his or her job to look for a new job because they are not being paid enough. Economists consider this employment to be a healthy part of a market economy, as it indicates that workers have the opportunity to earn higher wages.
• A key aspect of frictional unemployment is that workers continue to look for a new job. Yet many workers leave their jobs voluntarily for other reasons other than new employment opportunities; common forms of voluntarily leaving one’s job include going to become a full-time stay at home parent or retirement. Because these people are not actively looking for a new job, they are not considered unemployed, but rather have dropped out of the labor force. When the Bureau of Labor Statistics releases its monthly CPS report, it excludes those who have left the labor force voluntarily when calculating the unemployment rate.
• Seasonal unemployment, also a form of voluntary unemployment, occurs when certain industries lay off employees during periods in which business is particularly slow. For instance, ski resorts tend to lay off much of their staff during the summer months, or restaurants in a beach town with a tourism-based economy might drastically reduce their payroll during the winter. Employees generally know that a seasonal job is a temporary one, which is why it is considered voluntary unemployment. 

Involuntary unemployment occurs when a worker is forced to leave their job despite being willing to work at their current wage. 

• Cyclical unemployment occurs during recessions when a business can no longer afford to employ its workers because its revenues are falling due to decreased demand. This shock means that many workers who want a job do not have one. In turn, these laid-off workers consume less. It’s cyclical because laid-off workers contribute to the fall in economy-wide demand, which yields to further layoffs. The government tends to respond to cyclical unemployment with stimulus bills, which distribute stimulus checks to boost consumer demand or create short-term jobs for laid-off workers.
• Structural unemployment occurs when a certain job is no longer in demand because of long-term shifts in demographics, technology, or international comparative advantage. A few examples include coal miners losing their jobs because of technological advances in other energy sectors, American car or steelworkers losing their jobs to overseas competitors, or assembly line workers losing their jobs to automation. The decline of coal miners in the labor force since 1985 has been precipitous, as Figure 3 illustrates:

Figure 3.

Source: The Federal Reserve Bank of St. Louis.

It is not clear that declining employment in this sector is necessarily bad for the economy or the country as a whole. As the United States consumes more renewable energy, jobs in coal mining will necessarily become more sparse. The decline of American coal is a quintessential example of why some forms of structural unemployment are good for the economy over time.

The Pandemic and the Recession

These concepts within unemployment all relate to our most recent recession. The COVID recession was a particularly unusual one because it was the first time the economy shut down voluntarily. In this case, some forms of cyclical unemployment were voluntary because workers chose to stay home to avoid spreading COVID rather than working. However, many people still lost their jobs involuntarily because of decreased demand. A counterintuitive example of this occurred in the healthcare sector in 2020. Because of a decrease in demand for non-emergency surgeries, procedures, and check-ups, the healthcare industry contracted in early 2020 despite the onset of a pandemic.

Recent job reports possibly demonstrate the relationship between fiscal policy and job creation. Job growth in May and April was slower than economists expected. Economists have yet to reach a consensus as to why—it could be due to extended unemployment benefits, economic restructuring that has occurred as a result of the pandemic, continued hesitance to return to work due to health concerns and the risk of contracting COVID-19, or the normal friction of rehiring workers after a recession. Each of those explanations relies on key concepts related to unemployment: stimulus bills that respond to cyclical unemployment, structural unemployment, voluntary withdrawal from the labor force for health reasons, and frictional unemployment. In any case, it is useful to disaggregate the types of unemployment in this scenario to find the most effective macroeconomic policies.

Reflection Questions:

• When in my life have I experienced different types of unemployment?
• How aggressive should the government be in addressing structural unemployment via fiscal policy?
• How important is addressing unemployment for federal policymakers? Are there forms of unemployment that require no policy prescription?
• What are some other examples of each type of unemployment?