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Factors Affecting Labor Markets, Unemployment

Frictional unemployment, major economic problem, Structural unemployment, unemployment levels, Great Depression

A persistent problem for the U.S. economy and some of its workers is unemployment—not being able to find a job despite actively looking for work for at least 30 consecutive days. There are three major kinds of unemployment: frictional, cyclical, and structural. Each type of unemployment has different causes and consequences, and so public policies designed to reduce each type of unemployment must be different, too.

Frictional unemployment occurs as a result of labor mobility, when workers change jobs or wait to begin a new job. Labor mobility is, in general, a good thing for workers and the economy overall. It allows workers to look for the best available job for which they are qualified and lets employers find the best-qualified people for their job openings. Because this searching and matching by employees and employers takes time, on any given day in a market economy there will be some workers who are looking for a new job, or waiting to begin a job. Even when economists describe the economy as being at full employment there will be some frictional unemployment (as much as 5 to 6 percent of the labor force in some years). This kind of unemployment is generally not a major economic problem.

Cyclical unemployment occurs when the economy goes into a recession. The basic causes of cyclical unemployment are decreases in the levels of consumption, investment, or government spending in the economy, or a decrease in the demand for goods and services exported to other countries. As national spending and production levels fall, some employers begin to lay off workers. Cyclical unemployment varies greatly according to the health of the economy. Some of the highest unemployment rates for the last decades of the 20th century took place during the recession of 1982 to 1983, when unemployment levels reached almost 10 percent. The highest U.S. unemployment rate of the 20th century occurred in 1933, when the Great Depression left almost 25 percent of the labor force without work.

Sometimes the government can use monetary or fiscal policies to increase spending by businesses and households, for instance by cutting taxes. Or the government can increase its own spending to fight this kind of unemployment. . Perhaps the most famous example of this kind of tax cut in the United States was the one designed in 1963 and passed in 1964 by the administrations of U.S. president John F. Kennedy and his successor, Lyndon B. Johnson.

Structural unemployment occurs when people who are looking for jobs do not have the education or skills to fill the jobs that are currently available. Most policies designed to reduce structural unemployment provide training programs for these workers, or subsidize education and training programs available from colleges and universities, technical schools, or businesses. In some cases, the government provides support for retraining when increased competition from imported goods and services puts U.S. workers out of work or when factories are shut down because production is moved to another state or country.

Unemployment rates also vary sharply by occupation and educational levels. As a group, workers with college degrees experience far lower unemployment rates than workers with less education. In 1998 the unemployment rate for U.S. workers who had not graduated from high school was 7.1 percent; for high school graduates, the rate was 4.0 percent; for those with some college the rate was 3.0 percent; and for college graduates the unemployment rate was only 1.8 percent.

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