Unemployed: The Impacts of Frictional, Structural, and Cyclical Unemployment
Brayden Gin
English 12 Mrs. Wicken
Vancouver College
April. 15, 2021
Unemployment is a term that refers to a group of individuals who are actively searching for job opportunities, but are unable to find work due to various circumstances. The effects of unemployment have lingered throughout human history, from the Great Depression to the Great Recession, where the employment rates reached their lowest percentages. After the recessions, unemployment reached stable rates and the economy stabilized for the time being. However, in modern economics, unemployment continues to be a constant threat to the world’s economy and the social development of countries. As of recent years, society has experienced unprecedented job losses, and the underlying problems of unemployment rose once again. The International Labour Organization estimated that inactivity, people who are currently not working, but still hold a position, “…increased by 81 million, which reduced the global labour force participation rate by 2.2 percentage points in 2020 to 58.7 percent. Global unemployment increased by 33 million in 2020, with the unemployment rate rising by 1.1 percentage points to 6.5 percent” (ILO 2. Figure 1. Estimates of the working hours, employment and labour income lost in 2020, and projections for 2021).
Which begs the question, what conditions contributed to the recent climb in the rate of unemployment? Some people choose to believe that unemployment is a result of an influx of migrant workers and immigrants who are seizing their opportunities. In reality, unemployment is caused by a plethora of factors, which is the consequence of the changing times, including advancements in technology and job outsourcing. Recently, modern economists identified three categories of unemployment in the world that were major contributors to the rise in joblessness: frictional, structural, and cyclical.
First, what is frictional unemployment and why does it occur? Economist and Researcher Prateek Agarwal of the Intelligent Economist describes frictional unemployment as “…the temporary period when individuals leave the labour force to transition from one job to another” (Agarwal, “Frictional Unemployment”). As a result, friction in employment prevents the free movement of labour, meaning workers cannot immediately transfer to another job due to numerous reasons. Workers will often choose occupations based on how they fit into the labour market, meaning they select jobs that meet their requirements, including qualifications, skill sets, and fair wages. Some individuals take a brief period off from jobs before reentering the workforce (Agarwal, “Frictional Unemployment”). At first glance, frictional unemployment may seem like a minor factor in joblessness; however, it is a major contributor. In March 2021, The United States Department of Labour released an article called The Employment Situation — March 2021 that provided statistics of the current unemployment trends. It found that “The number of persons not in the labor force who currently want a job was about unchanged at 6.9 million in March…the number of persons marginally attached to the labor force, at 1.9 million, was essentially unchanged in March [2021]…These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. The number of discouraged workers, a subset of the marginally attached who believed that no jobs were available for them, was 523,000 in March [2021]” (“The Employment Situation — March 2021” 1). Although it may seem like there are not as many people who are transitioning between jobs, there are more people who are unemployed due to changes in careers than one may expect.
Second, what is structural unemployment and why does it occur? Economist and Researcher Prateek Agarwal describes the term as the result of “…mismatches between the skills required for available jobs and the skills held by the unemployed. Structural employment is often rooted in major economic shifts, including advancements in technology, globalization, and imports of goods” (Agarwal, “Structural Unemployment”). Recently, advancements in technology have had a substantial impact on unemployment rates. In some industries, managing an automated machine is more productive and efficient at a cheaper cost than hiring an employee. Prateek Agarwal adds that “Due to advancements in technology and manufacturers demanding higher productivity with lower costs, companies hire fewer employees across the board; companies achieve higher levels of productivity at lower costs when companies fire human workers in favor of applying new technologies” (Agarwal, “Structural Unemployment”). From 1990 to 2007, MIT Reporter Peter Dizkies and MIT Professor Daron Acemoglu conducted a study on the correlation between robots in industries and unemployment rates. Their research suggested that “…adding one additional robot per 1,000 workers reduced the national employment-to-population ratio by about 0.2 percent…This means each additional robot added in manufacturing replaced about 3.3 workers nationally, on average” (Dizkies, “How many jobs do robots really replace?”) In other words, adding one robot threatens the jobs of three employees. In addition to advancements in technology, globalization and imports are major factors in structural unemployment. Prateek Agarwal’s Structural Unemployment details globalization’s current situation, where “…firms can outsource their labor needs to countries where costs are lower. In the last thirty years or so, good, fairly paid manufacturing jobs have been moved to other countries, drawn by their lower costs of living and lower pay, as well as higher potential to exploit workers in cases where there are fewer labor regulations” (Agarwal, “Structural Unemployment”). As a result, a company will close “an enterprise in country A to move it to country B,” causing “job losses in a particular economic activity of country A” (Di Pietro et al. 2). Because of businesses moving overseas and cheaper labour costs in developing countries, imports have grown substantially over the years. Due to the growing demand for cheaper production, the global economy created export behemoths, such as China, that threaten local industry jobs in other countries. According to an MIT Economics Research paper, “…rising Chinese import exposure reduced U.S. manufacturing employment per population,” resulting in a fall by “…2.07 percentage points between 1991 and 2000 and by 2.73 percentage points between 2000 and 2007. Hence, we estimate that rising exposure to Chinese import competition explains…47 percent of the decline for the full 1991 through 2007 period” (Autor et al. 20–21). In Panel B of Figure 3, the line represents a downward trend when comparing “Change in Predicted Import Exposure per Worker” to “Change % Manufacturing Employment in Working Age Population” (Autor et al. 16. Panel B Figure 3. Change in Manufacturing Emp by Commuting Zone, 1990–2007).
The downward trend indicates the decline in manufacturing employment when there is greater exposure to imports. Because of advancements in technology, globalization, and increased imports, structural unemployment has had a significant influence on the rise of unemployment.
Third, what is cyclical unemployment and why does it occur? In his article Cyclical Unemployment, Prateek Agarwal classifies the term as unemployment that “…happens after an economy enters a period of contraction — that is to say, an economic decline or recession. As demand decreases, businesses are forced to lay off workers to make up for losses in sales and reduce expenses. Cyclical unemployment starts when companies go out of business entirely due to an economic recession, the workers at that company become unemployed. Next, fewer goods being ordered causes production to eventually decrease to match the lowered level of demand. Finally, there is less demand for labor as a result, since fewer jobs are available, and more workers become unemployed” (Agarwal, “Cyclical Unemployment”). For example, before the COVID-19 Pandemic, “The unemployment rate rose by 0.2 percentage point to 3.9 percent in December [2018], and the number of unemployed persons increased by 276,000 to 6.3 million.” (“The Employment Situation — December 2018” 1). Compared to during the COVID-19 Pandemic in March 2021, where “11.4 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic…Among those not in the labor force in March, 3.7 million persons were prevented from looking for work due to the pandemic” (“The Employment Situation — March 2021” 2). In hindsight, “The unemployment rate in the US during the Great Recession peaked at 9.5% in June 2009;” whereas, the unemployment rate during the COVID-19 Pandemic “…peaked at 14.8% in April” (Falk et al. 2). In figure 2, the graph displays the US Unemployment Rates from November 2004 to December 2020. In years where there was no recession, unemployment rates dropped as low as 3–4 percent. However, in years where there was a recession or major economic shift, unemployment rates reached as high as 10–15 percent (Falk et al. Figure 2. U.S. Unemployment Rate).
Due to large-scale layoffs of employees and business closures, cyclical unemployment and recessions establish themselves as the leading causes of unemployment, as seen during the Great Recession and the COVID-19 Pandemic.
Unemployment has forever been a contentious argument in terms of its cause. Recently, people have criticized migrant workers, immigration, and foreign investment for the declining employment rate. In reality, unemployment is the result of a varying spectrum of issues in the employment system. Frictional, structural, and cyclical are the most prevalent forms of unemployment that contribute to the steep decline in job hiring. From people transitioning between jobs to improvements in technology to COVID-19, the world has endured the pangs of unemployment and economic recessions. Therefore, society should refrain from fabricating excuses to justify a weak economy and, instead, tackle the issues of employee cutbacks due to shrinking job opportunities. By understanding the actual causes of unemployment, the world can find opportunities to alleviate the challenges of employee cutbacks and resolve the problems surrounding unemployment.
Bibliography:
Agarwal, Prateek. “Frictional Unemployment.” Intelligent Economist, Intelligent Economist, 17 Jan. 2021, www.intelligenteconomist.com/frictional-unemployment/.
Agarwal, Prateek. “Structural Unemployment.” Intelligent Economist, Intelligent Economist, 7 Dec. 2020, www.intelligenteconomist.com/structural-unemployment/.
Agarwal, Prateek. “Cyclical Unemployment.” Intelligent Economist, Intelligent Economist, 18 Nov. 2020, www.intelligenteconomist.com/cyclical-unemployment/.
Autor, David H, et al. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” MIT Economics, MIT, Aug. 2011, economics.mit.edu/files/7723.
Di Pietro, Michel A, et al. “The Impact of Globalisation on Employment.” European Commision, European Union, ec.europa.eu/eurostat/documents/1001617/4576272/SESSION-II-DOC-4.pdf.
Dizikes, Peter. “How Many Jobs Do Robots Really Replace?” MIT News | Massachusetts Institute of Technology, Massachusetts Institute of Technology, 4 May 2020, news.mit.edu/2020/how-many-jobs-robots-replace-0504.
Falk, Gene, et al. “Unemployment Rates During the COVID-19 Pandemic: In Brief.” Federation Of American Scientists, Congressional Research Service, 12 Jan. 2021, fas.org/sgp/crs/misc/R46554.pdf.
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