Unemployment: structural, frictional, and cyclical

The unemployment rate is the percent of people in the labor force who don't have a job and are actively looking for one. The rate of unemployment differs significantly across countries even when the global economy is booming as it did in 2005.

Types of unemployment

Structural unemployment: these are people who are laid off from sectors that are in decline and are in the process of making a transition to sectors that are expanding. For example, if the textile industry is shrinking while the health care industry is expanding, workers have to retrain and retool for the new opportunities.

Frictional unemployment: people who are between jobs because they just finished school, they move from one city to another, and because of other personal reasons.

These two types of unemployment are collectively called natural unemployment and can vary quite a bit between countries. In some countries, like the U.S. where it is easier for people to move between cities and jobs, and employers can hire and fire with few restrictions, the natural rate of unemployment is relatively low: 4-5 percent. In these countries, the labor market is flexible and people and companies adjust more rapidly to structural change. In other countries with many restrictions on hiring and firing and where local customs make moving across regions and cites more difficult, the natural rate of unemployment can be substantially higher.

Cyclical unemployment is the unemployment due to recessions. As the economy slows down and sales decline, companies lay off employees. The level of cyclical unemployment depends on the depth of the recession in a country. After the 2008 financial crisis the unemployment rate in Spain rose above 20 percent. If one assumes that the natural rate of unemployment in Spain is about 7-8 percent (just a guess), then the cyclical component of the unemployment rate was more than 12-13 percent.

Notice on the chart that the unemployment rate in Spain and in the U.S. goes up and down over time. These fluctuations reflect the cyclical unemployment as the economies go through the recessions and expansions of the business cycles. However, notice also that Spain has a much higher unemployment rate on average across years. That indicates a much higher natural rate of unemployment compared to the U.S.

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