Full employment refers to a circumstance where by all available labor are being utilized in the most economical and efficient way. Thus, it encompassed the highest levels of both skilled and unskilled labor that was absorbed in an economy at some specific point in time. In that case, the residual unemployment was considered frictional. Full employment can be realized within any economy, though it may lead to an inflationary period.
Frictional unemployment refers to the levels of unemployment when employees switch between jobs while still in the labor force; either due to redundancy or in search for new employment. It would also be referred to as ‘search unemployment’ since it related to the time consumed when searching for new employment. It was classified as voluntary unemployment since workers often selected to stay unemployed rather than take the first job that shows up. Thus, frictional unemployment was not inefficient since better skilled people opted to wait for a relevant job as opposed to working anywhere.
Structural unemployment refers to a circumstance where jobs are available, and people are willing to work, but the number of people qualified to fill these is inadequate. Employers would not get enough workers, and workers cannot find jobs they were skilled. There are two major causes of structural unemployment: industrial decline -where workers lose their jobs in declining industries and lack skills to work in the emerging ones. Obsolescence -whereby unemployment results due to new technology rendering a type of skilled labor obsolete. Structural unemployment was often permanent given the difficulty for many laborers to acquire new skills or relocate to areas where their skills were still marketable. Frictional and Structural unemployment will still occur even after the economy reaches its natural rate of unemployment.
Monetary policy, was usually, used to realize full employment in the economy. It was a fact that the economy always had some unemployment, even during economic expansions. The elusiveness of full unemployment has been attributed to the ever present structural employment and the frictional employment. Since full unemployment is unachievable in a free labor market, the natural rate of unemployment was introduced to describe the baseline rate of unemployment. Thus, the sum of structural and frictional unemployment rates constitutes to the natural rate of unemployment; excluding cyclical unemployment due downturn in the business cycle.
Increase in the Natural Rate of Unemployment between 2007 and 2012
The United States unemployment contains a substantial structural component that will persist even after full recovery from the recession. The three primary factors identified to be responsible for the increase in the natural rate of unemployment are: mismatches between the characteristics of job opportunities, like location or skill requirements. The demographics of the unemployed; availability of extended unemployment insurance benefits, may slacken the job search. They as well cause some to claim they are searching for jobs, a requirement for benefits receipt. They had in fact effectively left the workforce. Uncertainty about economic conditions, which might have induced firms to focus their energies at improving productivity and output without increased hiring of new workers. In that case, the increase in mismatch was limited. A larger contribution was found to ascend from extended unemployment insurance benefits, although that effect was likely to disappear when such benefits were allowed to expire. Conclusively, despite the natural rate of unemployment rising to a moderate degree in the past few years. A substantial slack remains in the labor market. That slack was likely to persist for many years. Ultimately, the natural rate was anticipated to fall back to around 5 percent that was its pre-recession level.
