Types of Unemployment and How it is Calculated

Measuring the Unemployment rate
The unemployment rate is measured by dividing the number of unemployed workers by the total number of workers in the labor force. To be a member of the labor force, one has to be able and willing to work. Those who don't meet these criteria are excluded from the labor force. Those excluded aren't being counted as members of the labor force are, children below 16 years of age, full-time students and retirees who are neither working nor looking for a job even on a part-time basis, people on long-term care or in prison, home-makers, and all other unemployed people who are not actively looking for a job at least for a month. In the US, Japan, and Sweden, data on the number of unemployed workers is collected through telephone surveys to households whereas in other European countries the data is collected from unemployment claims register. The OECD office estimates that of the total number of unemployed people in Europe, only 80% register to claim unemployment compensation benefits. This suggests that the European method of reporting the unemployment rate underestimates the true rate of unemployment. In general, the unemployment rate in European countries is higher than in the US due to generous unemployment benefits extended to unemployed workers of European countries.

Frictional
This is the transitional or temporary unemployment that occurs when unemployed workers take time to search for a new job after losing or quitting their old job or after entering or re-entering the labor force following illness, schooling, etc. In a free society where individuals decide which jobs to accept or reject, frictional unemployment is unavoidable. Providing unemployed workers with information on available vacancies, can help to reduce the duration of frictional unemployment.

Structural
This type of unemployment is associated with relocation of firms or the fundamental changes in the structure of an economy. It results when the geographic location of a job seekers is different from the location of employers. For example, unemployment in the snow-belt areas of the north has been higher than the national average for many years following the relocation of the textile industry into the southern states where labor and energy costs are lower. Such a locational mismatch of vacancies and job seekers can be remedied either by relocation of workers into high growth regions or by creating enterprise zones to attract industries into economically depressed regions through tax incentives.

Structural unemployment can also result due to a mismatch between the skill requirement of vacancies & the available skill of job seekers. For example, due to declining demand for coal because of environmental concerns, the demand for coal miners has been shrinking over the years. In recent years, growing foreign competition has contributed to a high rate of unemployment in certain industries such as the textiles and steel industries. However, as jobs in the coal mining and heavy manufacturing industries are disappearing, new vacancies in the service sectors are being created. To the extent that the unemployed coal miners do not possess the required skills in the newly created vacancies of the service sector, they are likely to remain unemployed. Such an occupational mismatch of available skill of workers and skill requirements of vacancies can only be remedied through retraining of workers.

The main causes for structural unemployment: foreign trade, locational mismatch, tech (widens wage gap), minimum wage, and unions.

Seasonal
This is the type of unemployment that is associated with seasonal variations. For example, unemployment in the agricultural & construction sectors tends to increase in winter seasons. During the Christmas season, the unemployment rate tends to decrease throughout the economy. Since fluctuations of seasonal unemployment are fairly regular from one year to the next, the unemployment statistic makes an adjustment to account for this type of recurring seasonal variation. For example, if unemployment in the construction industry is one percent higher in January than the annual average, the seasonally adjusted unemployment rate for the month of January, is reported by subtracting one percentage point from the unadjusted unemployment rate.

Cyclical
Cyclical unemployment is caused by deficiency of aggregate demand or by unfavorable supply shocks. Cyclical unemployment is associated with recessions and can be reduced through expansionary macro economic policies (i.e. fiscal and monetary policies).

Natural
Natural unemployment is the sum total of frictional, seasonal and structural. It is the unemployment rate which can occur even when cyclical unemployment is zero. Reducing the natural rate of unemployment requires microeconomic policies that target specific unemployment area or a specific group of long-term unemployed workers.

The level of output (GDP) that the economy can produce when the measured or actual rate of unemployment is the same as the natural rate of unemployment is the same as the natural rate of unemployment is known as the Natural or Potential Level of GDP. If the actual GDP is below the potential GDP, the economy will be in a recession. The amount by the potential level of GDP will exceed the actual level of GDP, is know as the GDP gap. The goal of macroeconomic policy is to close the GDP gap so that the observed rate of unemployment will be the same as the natural rate.