Suppose actual unemployment is 9% and the natural rate is 5%. What type of unemployment is the 4% gap?

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Question restatement: If actual unemployment is 9% and the natural rate is 5%, what type of unemployment corresponds to the 4 percentage point gap?
Option 1: Frictional. This type of unemployment arises from the normal turnover in the labor market—the time it takes for people to search for new jobs that match their skills and preferences. It does not describe a persistent gap between actual and natural unemployment, so it does not explain a sustained 4% shortfall.
Option 2: Structural. Structural unemployment occurs when there is a mismatch between the skills workers have and the skills the economy needs, or when there are long-lasting changes in the economy. While important, structural unemployment is not defined by a gap between actual and natural rates, but rather by longer-term changes in the labor market, making it an inadequate label for the 4% difference here.
Option 3: Cyclical. Cyclical unemployment is tied to the business cycle and reflects deviations of actual unemployment from the natural rate caused by economic downturns or upswings. When actual unemployment exceeds the natural rate by 4 percentage points (9% vs 5%), this is precisely the kind of gap that cyclical unemployment captures, representing demand shortfalls and recessions.
Option 4: Seasonal. Seasonal unemployment stems from regular, predictable fluctuations in employment due to seasons (e.g., agriculture, tourism). This phenomenon is periodic and within-year, not a persistent gap between actual and natural unemployment across the year, so it does not fit the scenario of a sustained 4 percentage point gap.
Analytical takeaway: The key concept is that the difference between actual and natural unemployment quantifies the cycle-related component of unemployment. The 4 percentage point excess aligns with cyclical unemployment, which varies with the business cycle, whereas frictional, structural, and seasonal unemployment refer to other, more static or regularly occurring factors that do not describe this gap. Therefore, the 4% difference is best understood as a cyclical phenomenon linked to economic fluctuations.

ECON_002_001_25F Problem Set 3

Suppose actual unemployment is 9% and the natural rate is 5%. What type of unemployment is the 4% gap?

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