ECONOMIC

implicit and explicit subsidies built into public programs; and long-term orstructural unemployment is caused by rigidities that create an imbalancebetween the skills and other characteristics possessed by workers and thosedemanded in the labor market.FRICTIONAL AND CYCLICAL UNEMPLOYMENTFrictional unemployment exists even in periods of very low overall unemployment.In a dynamic free-market economy layoffs occur as employersadjust their level of employment to such factors as changes in the relativedemand for goods and services, changes in the relative efficiency of firms,and seasonality in production or consumption. In addition, workers leavejobs to search for better employment opportunities, and they enter andleave the labor force at will. These layoffs and quits facilitate the process ofreallocating workers to more productive activities. Furthermore, whenworkers enter the labor force for the first time or reenter after having beenoutside the labor force for a time, they engage in a period of job search.There is usually a time lag in finding an acceptable job offer, in part becauseworkers, regardless of the cause of their unemployment, may not acceptthe first offer they receive. These lags result in periods of unemploymentthat are generally short and are required if labor resources are to be usedefficiently.Other types of unemployment are likely to be socially wasteful. Much attentionhas been given to the hardships and waste associated with cyclicalunemployment. Cyclical unemployment, the primary target of macroeconomicstabilization policy, will be eliminated when unemployment is reducedto a level where further increases in aggregate demand will affectprimarily the rate of inflation, with little impact on employment and output.Policies to reduce cyclical unemployment are discussed in Chapter 1.Yet even at what economists regard as full employment, some unemploymentmay exist in addition to that which is purely frictional. A part ofthis unemployment is a consequence of, or is induced by, public policy;and some is structural, the result of rigidities in the labor market that makeit difficult for some persons to find a job and remain employed for a longperiod.INDUCED UNEMPLOYMENT AND UNEMPLOYMENT COMPENSATIONInduced unemployment arises from incentives built into some public programs.One source of induced unemployment is the unemployment compensationsystem. Unemployment compensation has proved to be an extremelyuseful instrument for macroeconomic and income distributionpolicies. It serves as an important automatic stabilizer. Without the necessityfor new legislation, additional benefits are paid as unemployment fromjob layoffs increases, thereby helping to maintain the purchasing power ofthe unemployed. The system also serves as a means of distributing the costs ofa recession more equitably: it replaces part of the earnings lost as the result137