Unemployment falls into three categories:

1. Frictional unemployment
2. Structural unemployment
3. Cyclical Unemployment

Frictional unemployment refers to normal labour turnover that occurs when people leave jobs and with the creation and destruction of jobs. People leave jobs and look out for profiles that suit them. The time between jobs is called frictional unemployment. Companies too look for suitable candidates for roles designed in their company. One of the factors affecting frictional unemployment is unemployment compensation or welfare. If the unemployment benefit is large, the time people spend being frictionally unemployed tends to increase.

Structural unemployment comes into force when there is a change in technology or an outflow to competition. Workers need to retrain themselves to adjust to these structural changes, periods that tend to be longer than frictional unemployment. A growth in information technology means several workers were no longer required for some tasks that were automated; new job roles came into play such as project managers, logistics managers etc.

In the case of cyclical unemployment, it follows the patterns of the business cycles. Unemployment is low during expansion and high during contraction.

Measure of Unemployment

The participation ratio or the labour force participation rate refers to the percentage of persons in a population actively seeking employment. The participation ratio is usually greater during expansionary or growth phases and lower during recessionary phases due to lay-offs for example. When the cycle is in its early expansionary stage workers who lost jobs in the recessionary phase re-enter the job market rather than new entrants. It will therefore seem that despite increases in employment, the unemployment rates are high.

Another indicator of unemployment is productivity. As we discussed earlier during economy contraction stage while immediate lay-offs may not happen, companies may cut down on working time of employees. When the economy starts to expand unemployment will continue to stay at rates in the contraction stage, but will reduce as the economy expands further. Naturally all observations are made by using available data. Persons employed in illegal industries are not taken into account for.