Even during good times, most Americans know someone who has lost his or her job. In July 2007, the U.S. unemployment rate was only 4.7%, relatively low by historical standards. Yet in that month there were 4.5 million “job separations”—terminations of employment that occur because a worker is either fired or quits voluntarily.

There are many reasons for such job loss. One is structural change in the economy: industries rise and fall as new technologies emerge and consumers’ tastes change. For example, employment in high-tech industries such as telecommunications surged in the late 1990s but slumped severely after 2000. However, structural change also brings the creation of new jobs: after 2000, the number of jobs in the American health care sector surged as new medical technologies and the aging of the population increased the demand for medical care. Poor management performance or bad luck at individual companies also leads to job loss for their employees. For example, in 2009 General Motors announced plans to eliminate 47,000 jobs after several years of lagging sales, even as Japanese companies such as Toyota were opening new plants in North America to meet growing demand for their cars.

Continual job creation and destruction are a feature of modern economies, making a naturally occurring amount of unemployment inevitable. Within this naturally occurring amount, there are two types of unemployment—frictional and structural.