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As surprising as it may seem, some types of unemployment are not considered to be a problem, while other types are. Some unemployment is considered simply part of the natural workings of the labor market. It is useful to categorize unemployment into different types. Consider a recent college graduate with a degree in business administration. Although this person could easily get a relatively low-skilled job, such as taking orders at a fast food restaurant, he or she wants to put that education to work, and is looking for a job in a large investment firm. Such a person is an example of frictional unemployment. There will always be people who are out of work while looking for jobs for which they are well qualified or which are more desirable. As a result, there will always be some unemployment due to job search activities. Frictional unemployment will exist in any economy where people are free to choose their own jobs. Another type of unemployment that arises naturally in a dynamic economy is structural unemployment. This type of unemployment is due to changes in economic institutions, geographic displacement, technological change, and similar factors. For example, one result of the technological revolution is that personal computers have become more common than typewriters in the homes and workplaces of the United States. The dramatic decline in the number of typewriters sold in the United States means many workers, who were formerly making typewriters, are now employed in other industries. Such changes are inevitable in an ever-changing economy. The presence of frictional and structural unemployment is considered a natural, necessary, and even healthy part of an economic system. The combination of these two types of unemployment is called the natural rate of unemployment. This occurs as a natural part of a normal economy. One type of unemployment, on the other hand, is indicative of an economy that is not normal and healthy. Cyclical unemployment arises when the economy takes a turn for the worse. Recall that business cycles are fluctuations in the economy that cause changes in output and unemployment. The increase in unemployment above the natural rate during recessions and depressions is considered to be cyclical unemployment. When the unemployment rate goes above the natural rate, there are personal, social, and economic costs that are borne by the economy and the people within it. The personal costs stem from the fact that many people lose their jobs, their incomes, and perhaps their homes and families. Many people are thrown into poverty during recessions and depressions. This gives rise to many of the social costs associated with unemployment. An increase in unemployment means the number of poor people also increases. For example, during the recession of the early 1980s, the number of people in poverty rose by 10 million. This gives rise to an increasing number of welfare recipients and expenditures for unemployment and welfare programs.
Unemployment results in additional costs to the economy. With a decrease in the number of people who are working, there are fewer workers producing goods and services and there is, therefore, a commensurate decrease in output. In short, the economy is not producing as much as it could be producing. This is lost output that cannot be recouped. The estimates of lost output for the U.S. economy due to recessions since 1974 range up to $1.5 trillion.
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