The creation of "full employment" is a common economic policy goal. However, full employment does not imply zero unemployment. A dynamic economy will always have some unemployment; this is not necessarily harmful. Types of unemployment are often broken down as follows:

·Structural Unemployment - Changes occur in market economies such that demand increases for some jobs skills while other job skills become outmoded and are no longer in demand. For example, the invention of the automobile increased demand for automobile mechanics and decreased demand for farriers (people who shoe horses).

·Frictional Unemployment - This type of unemployment occurs because of workers who are voluntarily between jobs. Some are looking for better jobs. Due to a lack of perfect information, it takes times to search for the better job. Others may be moving to a different geographical location for personal reasons and time must be spent searching for a new position.

·Cyclical Unemployment - This occurs due to downturns in overall business activity.

As previously noted, full employment does not equate to zero unemployment. Some unemployment is normal in a market economy and is actually expected as part of an efficient labor market. Full employment is defined as the level of employment that occurs when unemployment is normal, taking into account structural and frictional factors.

The natural rate of unemployment is that amount of unemployment that occurs naturally due to imperfect information and job shopping. It is the rate of unemployment that is expected when an economy is operating at full capacity. At this time in the U.S., the natural rate of unemployment is considered to be about 5%.

Look Out!
The concepts of "full employment" and "natural rate of unemployment" are used extensively in macroeconomics - make sure you understand these concepts!


The Consumer Price Index & Inflation

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