Although most people usually refers to a certain level of unemployment in an economy, it is important to understand the different types of unemployment and their implication to the economy.

Cyclical unemployment

Cyclical unemployment is caused by a downturn in the business cycle. When aggregate demand falls in the economy, the demand for labor resources (a derived demand) also decreases as people are less inclined to purchase goods and services. Firms would be forced to lay off workers in order to maintain an acceptable profit margin.

On the other hand, should aggregate demand rises in an economy, the demand for labor resources would increase, accommodating for the increased demand for goods and services.

Structural unemployment

Structural unemployment occurs because of skill mismatch between those demanded by employers and those processed by employees. Economies in transition such as when Australia transition from the mining boom to a service based economy, would usually increase the level of structural unemployment. Workers skilled at industries that are declining would find their particular skill sets are no longer appropriate in newer industries where the type of skills required may be different. So even if the unemployed person wants to work, and the firms in the new industry require more labour, the mismatch of skills means that the structurally unemployed cannot find work.

Frictional unemployment

When there is a lack of unemployment due to lack of sufficient knowledge concerning how to find or apply for a job on the job seeker’s part or due to a lack of sufficient knowledge of where to find qualified employees on the employer’s part.

Seasonal unemployment

Where there is a lack of demand for employment in an industry due to seasonal changes. This often occurs for short periods of time, and as demand restores, this form of unemployment will also decrease. Eg. Ski resort workers may experience this type of unemployment in the off season.

Underemployment