Question

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant. d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.

Short answer

a. Frictional unemployment. b. Cyclical unemployment. c. Structural unemployment. d. Structural unemployment.

Step-by-step solution

Understanding Frictional Unemployment

Frictional unemployment occurs when people are temporarily between jobs or are searching for new jobs that better match their skills or preferences. It often happens when recent graduates are entering the job market.

Understanding Structural Unemployment

Structural unemployment is caused by a mismatch between the skills workers possess and the skills demanded by employers. This often occurs when technological advancements or outsourcing permanently change the job landscape, making some job skills obsolete.

Understanding Cyclical Unemployment

Cyclical unemployment occurs due to economic downturns or recessions, where there is not enough demand for goods and services, leading to job layoffs. It is directly related to the economic cycle of growth and contraction.

Analyze Scenario a

Tim, who just graduated and is searching for a job, is experiencing frictional unemployment, as he is in transition from education to employment.

Analyze Scenario b

The layoffs caused by a recession at a local factory represent cyclical unemployment, as it is linked to the economic downturn impacting the company’s ability to maintain its workforce.

Analyze Scenario c

Bus and truck drivers losing their jobs due to the advent of driverless vehicles is an example of structural unemployment, as technology has made their driving skills redundant.

Analyze Scenario d

The outsourcing of legal jobs from New York to India illustrates structural unemployment, as the work has moved to a location where the same skills are provided at a lower cost.

Key concepts

Frictional Unemployment

Frictional unemployment is all about the natural movement and transition within the labor market. It usually happens when people are temporarily without work as they shift between jobs or enter the market after finishing education.
For instance, consider someone like Tim, who just graduated. He's searching for a job that matches his qualifications and preferences. This period of job searching is what economists call frictional unemployment.
Frictional unemployment is not necessarily a bad thing. It points to the dynamic nature of job markets where individuals are looking for better matches for their skills and interests. This type of unemployment is often short-term and gives people the chance to find jobs that are the best fit for them.

• Occurs when individuals are between jobs or entering the workforce.
• Often seen in recent graduates.
• Usually short-term and considered a normal part of a healthy economy.

Structural Unemployment

Structural unemployment happens when there is a disconnect between the skills workers possess and the skills demanded by employers. This type of unemployment often results from technological advances or shifts in the economy that make certain skills obsolete.
A prime example of structural unemployment can be observed when new technologies, like driverless vehicles, make specific jobs redundant. If bus and truck drivers find themselves without work because of these technologies, they face structural unemployment. Another example is outsourcing, where the same job skills are available in another location for less money, like legal jobs moving from New York to India.
This mismatch means workers need to retrain or acquire new skills, which can take time and effort. As a result, structural unemployment tends to last longer than frictional unemployment.

• Caused by changes in the economy or technology that make certain job skills obsolete.
• Examples include advancements such as automation or outsourcing of jobs to lower-cost locations.
• Leads to the need for retraining or skill acquisition, often has a longer duration.

Cyclical Unemployment

Cyclical unemployment is tied to the ups and downs of the economic cycle. When the economy enters a recession, the demand for goods and services falls, leading to business slowdowns and layoffs.
Consider a local factory where 30 workers are laid off during a recession. These layoffs are typical of cyclical unemployment because they occur due to decreased economic activity. As the economy recovers, companies often rehire workers, which is why cyclical unemployment is closely linked to economic cycles.
This type of unemployment demonstrates how a broader economic downturn affects employment across different sectors. It's an important concept to understand the sensitivity of job markets to economic health.

• Arises from economic downturns or recessions affecting the overall demand for labor.
• Characterized by layoffs due to reduced business activity.
• Tends to fluctuate with economic growth and contraction, often temporary as the economy rebounds.