From Mike Moffatt,
Your Guide to Economics.
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A.

[Q:] While a high unemployment rate indicates an economy in distress, is a 0% rate really ideal for a country? I realize that a tiny percentage of unemployed is inevitable but let's say a country could attain a 0% rate. Would it? If not, what are some reasons why a country might want to maintain a small percentage as opposed to a 0%?

[A:] Thanks for the great question!

While on the surface it appears that a 0% unemployment rate would be terrific for the citizens of a country, having a small amount of unemployment is actually desirable. To understand why, we need to look at the three types (or causes) of unemployment:

1. Cyclical Unemployment is defined as occuring "when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high." When the economy goes into recession and workers are laid off, we have cyclical unemployment.

2. Frictional Unemployment: The Economics Glossary defines frictional unemployment as "unemployment that comes from people moving between jobs, careers, and locations." If a person quits his job as an economics researcher to try and find a job in the music industry, we would consider this to be frictional unemployment.

3. Structural Unemployment: The glossary defines structural unemployment as "unemployment that comes from there being an absence of demand for the workers that are available". Structural unemployment is often due to technological change. If the introduction of DVD players cause the sales of VCRs to plummet, many of the people who manufacture VCRs will suddenly be out of work.

By looking at these three types of unemployment, we can see why having some unemployment is a good thing.

Most people would argue that since cyclical unemployment is the by-product of a weak economy, it is necessarily a bad thing, though some have argued that recessions are good for the economy. The latter is not a position I hold, so I'm willing to accept that generally speaking, a zero level of cyclical unemployment is likely to be beneficial.

What about frictional unemployment? Let's go back to our friend who quit his job as an economic research to pursue his dreams in the music industry. He quit a job he disliked to attempt a career at the music industry, even though it caused him to be unemployed for a short while. Or consider the case of a person who is tired of living in Flint and decides to make it big in Hollywood and who arrives in Tinseltown without a job. A great deal of frictional unemployment comes from people following their hearts and their dreams. This is certainly a positive type of unemployment, though we would hope for these individuals' sakes that they do not stay unemployed for too long.

Finally, structual unemployment. When the car became commonplace, it cost a lot of buggy manufacturers their jobs. At the same time, most would argue that the automobile, on net, was a positive development. The only we could ever eliminate all structural unemployment is by eliminating all technological advancement.

By breaking down the three types of unemployment into cyclical unemployment, frictional unemployment, and structural unemployment, we see that an unemployment rate of 0% is not a positive thing. A positive rate of unemployment is the price we pay for technological development and for people chasing their dreams.

Thank you for your question.

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