Frictional, Structural and Cyclical Unemployment

Economists classify unemployment on the basis of WHY it occurs. Three types recur across almost every economy, including India's organised sector, and are studied together because each has a different underlying cause and a different policy response.

Frictional unemployment

Frictional unemployment is short-term, transitional unemployment that occurs when workers are between jobs — for example, a person who has resigned from one job and is searching for another more suitable one, or a fresh graduate who has not yet found a first job. It arises because matching a specific worker to a specific vacancy takes time: information about vacancies is imperfect, and workers evaluate offers before accepting them. Frictional unemployment is considered a normal feature of even a healthy, fully-employed economy, since job search and job matching can never be instantaneous.

Structural unemployment

Structural unemployment arises from a mismatch between the skills that job-seekers possess and the skills that employers actually demand, or from long-term shifts in the structure of the economy — for example, when a traditional industry declines because of new technology, and the workers displaced from it lack the skills demanded by expanding modern industries. Unlike frictional unemployment, structural unemployment tends to persist over a longer period because it needs retraining, re-skilling, or migration to a different region or industry to resolve — not merely time spent searching.

Cyclical unemployment

Cyclical unemployment is linked to the business cycle — the periodic phases of boom and recession/slowdown that a modern economy passes through. During a recession, aggregate demand for goods and services falls, firms cut production, and workers are laid off; during recovery and boom phases, cyclical unemployment falls again as demand and output pick up. J. M. Keynes emphasised this type of unemployment, arguing that a deficiency of aggregate (effective) demand in the economy — not simply an unwillingness of workers to accept a lower wage — was the true cause of large-scale unemployment during a depression, and that government spending could be used to raise aggregate demand and reduce it.

| Type | Underlying cause | Typical duration | Example |

|---|---|---|---| …