LO2
Types of Unemployment
Frictional Unemployment
• unemployment caused by the fact that it takes time for
people to find their first job or to move between jobs
Structural Unemployment
• unemployment that results from a mismatch in the
skills or location between jobs available and people
looking for work.
© 2012 McGraw-Hill Ryerson Limited
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LO2
Types of Unemployment
Cyclical Unemployment
• occurs as a result of the recessionary phase of the
business cycle
Discouraged Worker
• an individual who wants work but is no longer
actively seeking it because of the belief that no
opportunities exist
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LO2
Types of Unemployment
Full Employment
• situation in which there is only frictional and
structural unemployment
• cyclical unemployment is zero
Natural Rate of Unemployment
• the unemployment rate at full employment
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Self-Test 4
LO2
Categorize each of the following sets of circumstances as
frictional, structural, or cyclical unemployment.
a) Sanjit, a pulp-mill worker, is laid off because the mill’s
inventories are at an all-time high.
b) Five weeks ago, Alison left a job she did not like and is
still looking for another job.
c) Ian was a fisher on the East Coast but sold his boat after
years of hard work with little return. He has not been
employed now for almost a year.
© 2012 McGraw-Hill Ryerson Limited
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LO2
Criticisms of the Official Rate
The reported unemployment rate may be:
• Understated because part-timers are included as
full-timers;
• Understated because it excludes discouraged
workers;
• Overstated because of false information from
some EI recipients; or
• Overstated because of false information from
those working in the underground economy
© 2012 McGraw-Hill Ryerson Limited
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LO2
Costs of Unemployment
GDP Gap
• the difference between potential GDP and actual
GDP (real or nominal)
GDP Gap = Potential GDP – Actual GDP
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LO2
Costs of Unemployment
Okun’s Law
• for every 1 percent of cyclical unemployment an
economy’s GDP is 2.5 percent below its potential
GDP gap = 2.5  cyclical unemployment (%) 
actual GDP (real or nominal)
Example: if UE = 8%, natural rate = 6%, GDP = $1622 b
GDP gap = 2.5 x 2% x $1622 billion
= $81.1 billion
© 2012 McGraw-Hill Ryerson Limited
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Self-Test 6
LO2
Given a natural rate of unemployment of 8
percent, an actual rate of 10 percent, and
real GDP of $800 billion, calculate potential
GDP.
© 2012 McGraw-Hill Ryerson Limited
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