pcecon.com Class Notes
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Information is costly, which means that finding a job always takes time. There are always some people moving out of their parents’ home, looking for their first job, getting out of the military, or finishing school. Those people will be unemployed for a while while they are searching for a job (there’s no way to prevent it). That’s the natural rate of unemployment.
If at the end of a person’s job search, she finds a job (it just took time to do so) we call the kind of unemployment frictional unemployment
If a person looks for a job, but discovers his skills don’t match what employers are looking for (so he stops his job search to get retrained) we call the unemployment structural unemployment
Natural unemployment contains some of each of these (frictional and structural); the amounts depend on the economy and how many people are entering the job market or voluntarily changing professions, etc. Estimates of it range from 4-5%, and it can vary over time.
Cyclical unemployment is unemployment due to ups and downs in the economy. It includes unusual amounts of frictional and stuctural caused by general slowdowns in employers’ hiring and increases in layoffs.
Actual unemployment we measure includes both some natural and some cyclical:
(unemployed/laborforce)=unemployment rate= natural + cyclical
Full Employment is when we only have natural unemployment (the cyclical unemployment is zero)