Since there will always be workers searching for new jobs, there will always be frictional unemployment. Frictional unemployment and structural unemployment are the two types of unemployment that naturally occur. This “natural” type of unemployment is calculated as the natural rate of unemployment. To estimate the unemployment rate, the U.S. Bureau of Labor Statistics (BLS) uses data on the employment status of the U.S. population from a monthly survey of approximately 60,000 households. A person must have no job and must actively be seeking a job to be considered unemployed. If they are not actively searching for a job, they are not considered part of the labor force and are not counted in the unemployment rate. To be considered frictionally unemployed, a person must be between jobs and must not have lost their job for structural or cyclical reasons. For example, a worker who quits their job in anticipation of lining up another one or someone who has just entered the workforce after graduation would be considered frictionally unemployed.
How Does Frictional Unemployment Work?
A person is frictionally unemployed if they voluntarily leave or are fired from their job. New entrants into the workforce who are searching for their first job would also count as being frictionally unemployed. Frictional unemployment is considered to be less problematic than other types of unemployment because it reflects the time it takes for workers to find jobs that suit them best. A function of a healthy economy is when workers move into jobs where they’re most productive. Out of the three main types of unemployment measured by the BLS, frictional unemployment is temporary. Structural unemployment, which is when someone loses their job due to a mismatch in skills, lasts much longer as someone likely needs to learn new skills before finding a job. The other type of unemployment is cyclical unemployment, which can create more unemployment. Cyclical employment is not considered naturally occurring and is seen as a result of an economic recession.
What Is the Lowest Level of Unemployment the U.S. Economy Can Sustain?
The natural rate of unemployment measures unemployment that occurs outside of business cycle recessions. This comprises frictional, structural, and surplus unemployment. Since both frictional and structural unemployment occur naturally in a market, the lowest level of unemployment the U.S. economy can have—and sustain—depends on how low the rates for these two types of unemployment can go. According to the Federal Reserve, “the lowest level of unemployment that the economy can sustain changes over time as the jobs market changes. …Even in good times, a healthy, dynamic economy will have at least some unemployment as workers switch jobs, and as new workers enter the labor market.” In the graph below from the Federal Reserve Bank of St. Louis, the natural rate of unemployment in the U.S, which is represented as the noncyclical rate of unemployment, has fluctuated since the late 1960s. The highest rate of noncyclical unemployment between 1952 and 2022 was in 1978 when it reached 6.2%. It hit a low of 4.4% in 2022. The graph below shows that even when the overall unemployment rate is low, there will always be some level of unemployment due to frictional and structural unemployment since workers will continue to switch jobs and new workers will enter the labor market.
