What you will learn
in this Module:
126 section 3 Measurement of Economic Performance
- The three different types of
unemployment and their
causes - The factors that determine
the natural rate of
unemployment
Module 13
The Causes and
Categories of
Unemployment
The Natural Rate of Unemployment
Fast economic growth tends to reduce the unemployment rate. So how low can the un-
employment rate go? You might be tempted to say zero, but that isn’t feasible. Over the
past half-century, the national unemployment rate has never dropped below 2.9%.
Can there be unemployment even when many businesses are having a hard time
finding workers? To answer this question, we need to examine the nature of labor mar-
kets and why they normally lead to substantial measured unemployment even when
jobs are plentiful. Our starting point is the observation that even in the best of times,
jobs are constantly being created and destroyed.Job Creation and Job Destruction
In early 2010 the unemployment rate hovered close to 10%. Even during good times,
most Americans know someone who has lost his or her job. The U.S. unemployment
rate in July 2007 was only 4.7%, relatively low by historical standards, yet in that month
there were 4.5 million “job separations”—terminations of employment that occurred
because a worker was either fired or quit voluntarily.
There are many reasons for such job loss. One is structural change in the economy:
industries rise and fall as new technologies emerge and consumers’ tastes change. For
example, employment in high-tech industries such as telecommunications surged in
the late 1990s but slumped severely after 2000. However, structural change also brings
the creation of new jobs: since 2000, the number of jobs in the American healthcare sec-
tor has surged as new medical technologies have emerged and the aging of the popula-
tion has increased the demand for medical care. Poor management performance or bad
luck at individual companies also leads to job loss for their employees. For example, in
2005 General Motors announced plans to eliminate 30,000 jobs after several years of