Full employment implies the level of employment in which there is absence of cyclical or demand-deficient unemployment. Furthermore, full employment is defined as the adequate level of unemployment above zero rate of unemployment; the deviation from zero rate of unemployment is explained by the existence of non-cyclical types of unemployment. Indeed, presently full employment is defined as the Non-Accelerating Inflation Rate of Unemployment arising from economists’ argument that an unemployment rate of above 0% is critical to control the rate of inflation. Zero rate of unemployment is considered detrimental because workers would demand pay rise fuelling inflation. Since 1949 to date, the full employment level in the United States has been between 5 per cent and 6.1percent. Years 1973-1981 and the period after the global financial crisis recorded an average unemployment rate of 6.1% while full employment was highest between 2000 and 2008 with an unemployment rate of 5% (US Bureau of Labour Statistics para 1-4).
Frictional unemployment refers to the type of unemployment arising from people changing from one to another or the period when a worker is searching for a job. New graduates experience frictional unemployment as they search for a job that fits their knowledge and skills. Usually parents temporarily leave their jobs to raise their young children and will experience frictional unemployment as they return to the job market. Similarly, people will change careers or move to other towns and remain unemployed for sometimes. Frictional unemployment lasts for a short period of time and from an economic perspective, it is not an economic problem. The distinction between frictional unemployment and other types of unemployment is that it is voluntary on the part of the worker. Frictional unemployment is beneficial to the economy since workers take time to find the best match resulting into better allocation of resources. Nonetheless, long and unnecessary frictional unemployment is negative to the economy as economic resources lie idle. Frictional unemployment is present in the economy at all times; this explains the reason why full employment is less than 100%.
Structural unemployment occur when there is a mismatch between the job openings available and the skills possessed by job seekers. Consequently, people who lack the required skills or level of education are referred to as structurally unemployed. Structural unemployment usually occurs when the economy undergoes structural changes (from agricultural-based to industrial) or technological change. For example, automation of many industrial processes has rendered many people unemployed. Change in the composition of output due to variation in the types of products people demand will lead to structural unemployment. For instance, the demand of typewriters has significantly gone down thus workers in the typewriter industry are structurally unemployed. Similarly, the advent of emails has lowered the demand for posted letters; workers in the postal industry have increasingly become structurally unemployed.
Natural unemployment refers to the equilibrium rate of unemployment i.e. the aggregate supply of labour is in balance with the aggregate demand for labour. In other words, involuntary unemployment is non-existent. The natural rate of unemployment for the second quarter of 2014 in the US is 5.8%. The actual rate of unemployment is usually higher than the natural rate of unemployment as it encompasses the underemployed (part-time workers who prefer working full time) and discouraged workers in the economy. A low natural rate of employment will imply a lower percentage of actual rate of employment thus the economy is most likely to be operating at equilibrium. For the 1st quarter of 2014, the natural rate of unemployment was at 5.9% while the actual rate of unemployment was at 11.8% (Federal Reserve Bank of St Louis para 1).
The natural rate of unemployment increased during the financial crisis because of three concrete reasons. First, discrepancy or disparity in labour supply and demand across industry sectors, geographic areas or skill groups. Although there exist an acceptable level of mismatch in the economy, any rise above this level leads to resource wastage. Hiring becomes expensive while it makes it hard for a worker to get a job. For example the financial and construction industries have not recovered thus workers in these sectors will experience lengthy period of unemployment due to skill mismatch (Daly, Hobijn, Sahin, and Valletta 17-19).
Secondly, the US government has extended the duration in which the unemployed are eligible to receive unemployment benefits. This is counterproductive for two reasons. Foremost, the availability of the unemployment benefits reduces individuals’ intensity to search for jobs and even accept job offers. The benefits lower the net gains of finding and getting a job as well as provide resources for families to maintain their previous levels of consumption. Secondly, people not searching for jobs will brand themselves as active jobseekers to qualify as recipients of the benefits. Consequently, the natural rate of unemployment was higher during the recession as people relied on the unemployment benefits (Daly, Hobijn, Sahin, and Valletta 20-21).
Finally, the harshness of the recent economic recession combined with formulation of unfavourable government policies have led to heightened uncertainty in the economic environment in which firms operate. Harsh labour force laws have lowered the incentives for firms to hire thus leading to a higher natural rate of unemployment (Daly, Hobijn, Sahin, and Valletta 23).
Works cited:
Daly, Mary C., Bart Hobijn, Ay ̧segul ̧Sahin, and Robert G. Valletta. “A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?” Journal of Economic Perspectives, vol 26 no 3, summer 2012, pg 3-26. Accessed 10th October 2014 < http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.26.3.3>
Federal Reserve Bank of St Louis. Natural rate of unemployment (Short-term), 4th September 2014. Accessed 10th October 2014 <http://research.stlouisfed.org/fred2/series/NROUST>
US Bureau of Labour Statistics. Employment situation-September 2014, 3rd October 2014. Accessed 10th October 2014 <http://www.bls.gov/news.release/pdf/empsit.pdf>
