Friday, January 21, 2011

Frictional Unemployment

Frictional unemployment came up in class the other day.

The problem with this is that it is qualitative, while our measurements of unemployment are quantitative. What makes someone unemployed frictionally?

Remember there are 4 types of unemployment (in order of severity): frictional, seasonal, cyclical, and structural.

Frictional unemployment is the baseline of people who have voluntarily separated from their jobs and are looking. It’s a floor on how low we can get the overall unemployment rate. We think this is somewhere in the 4-6% range.

Over the long-term, frictional unemployment rises with the proportion of young people in the labor force. It’s probably been edging up recently because of the baby boomlet. It certainly edged up quite a bit from the mid 60’s to the mid 80’s because of the baby boom.

Over the short-term, frictional unemployment will also move opposite to the business cycle (this is called being counter-cyclical). The reason is that people are unlikely to choose to voluntarily separate from a job around a recession.

Here’s a chloropleth of unemployment rates by county in 2008:

The severity and unevenness of the recession is readily apparent. Having said that, the blue areas are probably dominated by frictional unemployment, while the other colors indicate varying degrees of cyclical and structural unemployment.

As to the other types, reported numbers include nothing about seasonal unemployment (which is actually quite large) because the announced unemployment rate is seasonally adjusted. People would panic about the economy every January if they didn’t do this.

My guess is that cyclical unemployment is pretty low right now. If it was high, we’d expect the sustained growth of the economy over the last 18 months to have reduced the overall rare quite a bit.

That means that most of the large and sustained uptick in the unemployment rate since 2008 is structural unemployment: people who can’t find jobs because their skills are no longer needed by the economy.

N.B. The link above is to Wikipedia’s unemployment site, which is pretty thorough.

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