Is frictional unemployment a sign that the economy isn't doing well? It's actually the opposite. Most people who are unemployed are part of the frictionally unemployed group. This is a sign that the supply of labor is matching the demand and is thought to be a positive occurrence. Of course, if the rate gets to be too high, then this could be harmful to the economy. However, in the short-term it's considered to be beneficial. To learn the meaning of frictional unemployment, the causes and effects, and the theories as well, continue reading below.
What is Frictional Unemployment?
Frictional unemployment is essentially the "in-between jobs" unemployment. It's when people are actively seeking new jobs, perhaps after quitting their old one, graduating from school, or moving to a new city. This type of unemployment is not due to a lack of job opportunities but rather the time it takes to match job seekers with the right job openings.
Frictional Unemployment Definition
The definition of frictional unemployment in economics is as follows:
Frictional unemployment is defined as the portion of total unemployment that results from the normal turnover of labor, as workers move between jobs and industries, seeking the best use of their skills and talents. It is a temporary and voluntary form of unemployment that arises from the time delay between when an individual starts looking for a new job and when they actually find one.
This type of unemployment is the most common and is usually short-term. It's also a sign of a healthy economy rather than an unhealthy one and is part of natural unemployment.
Natural unemployment is a hypothetical rate of unemployment suggesting that there will never be zero unemployment in an economy that is operating well. It's the sum of frictional and structural unemployment.
But why is unemployment considered to be a sign of a healthy economy? Well, a strong and healthy economy would allow for people to switch jobs (if they so desire) without fear that they will remain jobless because they cannot find a new or more suitable position. While they will be jobless for a short period of time, they are confident that there will be another job with comparable pay available for them.
Let's say Bob just graduated with a degree in computer science. Although there are plenty of jobs available in his field, Bob doesn't get hired immediately upon graduation. He spends a few months interviewing with different companies, trying to find the right fit for his skills and interests. This period of job searching, where Bob is unemployed but actively looking for work, is a classic example of frictional unemployment.
Frictional Unemployment Examples
Frictional unemployment examples include:
- People who leave their current job to find a better one
- People who are entering the workforce for the first time
- People who are reentering the workforce
Let's take a look at the percentage rates for different durations of unemployment in the United States for March of 2021 and compare it to March of 2022 as a frictional unemployment example.
Fig. 1 - Frictional unemployment example: US March 2021, StudySmarter. Source: US Bureau of labor statistics1
Fig. 2 - Frictional unemployment example: US March 2022, StudySmarter. Source: US Bureau of labor statistics2
Let's start by looking at the pink slice of the data chart pie in Figure 1 and comparing it to Figure 2. The pink slice of the pie represents those who were unemployed for less than 5 weeks, and this short period of time is most likely frictional unemployment. In Figure 1 the rate of those that were unemployed for less than 5 weeks was 14.4%, and that number jumped to 28.7% in Figure 2. That's double the previous year's rate!
By looking at graphs that show the duration of unemployment during a certain period of time and contrasting it with a later time, you can usually tell which part is the frictional unemployment rate due to its short duration. Frictional unemployment is usually considered to be a voluntary type of unemployment meaning that the person is currently unemployed by choice. However, those who left willingly along with those who left unwillingly are all counted as frictionally unemployed.
Calculating Frictional Unemployment
There is a way to calculate the frictional unemployment rate. But first, you have to know the sum of the three categories of frictional unemployment and the total labor force.
The three categories of frictional unemployment are:
- Job leavers
- Those reentering the workforce
- Those entering the workforce for the first time
Labor force is the combination of employed and unemployed workers who have the willingness and ability to work.
All of these put together would give us the total number of frictionally unemployed people. We can then input the numbers we have into the equation below:
\begin{equation}
\text{Frictional unemployment rate} = \frac{\text{Number of frictionally unemployed}}{\text{Number of labor in force}}\times100
\end{equation}
Imagine you're asked to calculate the frictional unemployment rate for Country Z. The table below shows the data you are to use in your calculation.
| Labor Market Information | # of people |
| Employed | 500,000 |
| Frictionally unemployed | 80,000 |
| Structurally unemployed | 5,000 |
Using the frictional unemployment rate formula, how would you solve this?
Step 1
Find the # of frictionally unemployed people.
Frictionally unemployed = 80,000
Step 2
Calculate the # of people in the labor force.
\begin{align*}
\text{Labor force} &= \text{Employed} + \text{Frictionally unemployed} + \text{Structurally unemployed} \\
&= 500,000 + 80,000 + 5,000 \\
&= 585,000
\end{align*}
Step 3
Divide the number of frictionally unemployed people by the # of people in the labor force.
\begin{align*} \\ \frac{\#\, \text{frictionally unemployed}}{\#\, \text{in labor force}} & = \frac{80,000}{585,000} \\ & = 0.137 \end{align*}
Step 4
Multiply by 100.
\(0.137 \times 100=13.7\)
13.7% is the rate of frictional unemployment!
What Causes Frictional Unemployment?
Included below are the usual causes of frictional unemployment:
- An employee doesn't feel fulfilled at their current position and leaves to find a new position
- An employee feels that if they switch jobs they would have better opportunities
- A person doesn't want to work full-time anymore and leaves to find a job with fewer hours
- An employee is not happy with their current working conditions and leaves in search of a new position
- A person leaves to take care of sick family members or are sick themselves
- An employee has to move for personal reasons
- An employee wants to go back to school and further their education
During times of economic instability, the rate of frictional unemployment decreases. Employees fear they might not find another job so they remain at the one they're at until the economy heals enough for them to leave.
Disadvantages of frictional unemployment
Frictional unemployment also has certain disadvantages that can impact individuals and the economy as a whole. While it fosters job mobility and skill enhancement, it can simultaneously lead to periods of financial instability for individuals and indicate a mismatch between the available jobs and worker skills or expectations in the economy.
Disadvantages of frictional unemployment include financial hardship for individuals, waste of resources in the economy, mismatch of skills can lead to structural unemployment, increased burden to the state.
Financial hardship
While unemployment benefits can help, periods of joblessness can still lead to financial hardship for many individuals, especially those with limited savings or high financial obligations.
Waste of resources
From an economic perspective, having a section of the employable population not contributing to production can be seen as a waste of potential resources.
Mismatch of skills
Frictional unemployment can indicate a mismatch between the skills workers possess and the skills employers need. This can lead to longer periods of joblessness and could potentially require retraining or education.
Increased burden on the state
The provision of unemployment benefits puts a financial strain on the state. If levels of frictional unemployment are high, this could lead to increased taxes or cuts in other areas of public spending.
In summary, while frictional unemployment has its advantages, it's also associated with certain disadvantages, such as potential financial hardship for individuals, waste of resources, skill mismatch, and increased burden on the state. Understanding these disadvantages is critical to managing and minimizing the negative impacts of frictional unemployment in an economy. It's a delicate balance, but with the right policies and support, a healthy level of frictional unemployment can be maintained.
Discouraged Workers and Hidden Unemployment
Frictional unemployment can result in discouraged workers. Discouraged workers fall under the umbrella of hidden unemployment, which is unemployment that is not counted when calculating the unemployment rate.
Discouraged workers are people who have grown discouraged (hence the name) in finding a job. They stop their search and are no longer considered part of the labor force.
Fig. 1 - Discouraged worker
The unemployment rate is usually represented by a percentage and informs us of how many people in the labor force are jobless but currently seeking employment.
Other people considered part of the hidden unemployment group are those working fewer hours than they would like or working jobs that they are overqualified for. Some people do not accept jobs they are overqualified for because they are waiting to hear back from another, better job. This is also known as wait unemployment. In theory, this type of unemployment might be beneficial because at least the person has a job, right? But since the person accepted a job they are overqualified for. They are also most likely getting underpaid for their work.
To learn more about unemployment in general and how to calculate the unemployment rate check our explanation on Unemployment
Imagine a law student in New York who just graduated. They send out applications to huge law firms that they know pay well but are extremely competitive. They know from others they've talked to that it takes months to hear back from these law firms due to so many applications constantly pouring in. Since the recent grad has loans to pay back and other bills to pay, they accept a job busing tables at a nearby restaurant to earn some money. They're overqualified for this position but waiting to hear back. In the meantime, they are getting paid minimum wage and are now struggling to make ends meet. Since they technically have a job, they cannot be counted as unemployed.
Benefits of Frictional Unemployment
Frictional unemployment, despite its label, isn't an entirely negative concept. It's an inherent element of an ever-changing labor market where workers seek better opportunities and employers search for the most suitable talent. This type of unemployment is a natural part of a healthy, fluid economy and can offer several benefits.
Furthermore, the state plays a crucial role in managing frictional unemployment. By providing unemployment benefits, the state ensures that its citizens' minimum needs are met during periods of unemployment. This safety net encourages workers to take calculated risks in seeking better employment opportunities without fearing financial ruin.
The advantages of frictional unemployment include opportunities for better job matching, skill enhancement, and stimulation of economic dynamism.
Opportunity for better job matching
When workers voluntarily leave their jobs to find better opportunities, it enhances the overall efficiency of the job market. They can find roles that better match their skills and interests, leading to increased job satisfaction and productivity.
Skill enhancement
During periods of frictional unemployment, workers often take the opportunity to upskill or reskill. This can lead to an overall increase in the skill level of the workforce.
Stimulates economic dynamism
Frictional unemployment can indicate a dynamic economy where workers feel confident in leaving their jobs to seek better opportunities. This dynamism can lead to innovation and growth.
In conclusion, frictional unemployment is a complex component of any economic system. While it can present challenges, it also offers significant benefits, including better job matching, skill enhancement, economic dynamism, and government support. It's important to remember that a certain level of frictional unemployment is necessary and beneficial for a healthy, evolving economy.
Frictional unemployment theories
Frictional unemployment theories generally focus on a few ways to "control" frictional unemployment, but the reality is that these would simply influence more people to find jobs quicker instead of spending as much time as they currently do staying unemployed. This would mean they're still frictionally unemployed, but for a shorter period of time. Let's explore some of the ways this can be controlled:
Frictional Unemployment: Reduce unemployment benefits
If a person decides to apply for unemployment, they will be collecting benefits as long as they don't have a job. For some, this might encourage them to take their time finding a new job since they have incoming funds. A way to shorten the time spent being in between jobs would be to reduce the unemployment benefits given. This could instead encourage people to find a new position faster since their income is reduced. However, a downside to this could be that in the rush to find a new position, they end up taking any job, even if it's one they're overqualified for. This would just add more people to the hidden employment group and is probably not the best course of action.
Frictional Unemployment: More job flexibility
Some of the reasons that people leave their jobs are because of better opportunities, relocation, or the hours that they want to work not being available. By being more flexible and offering options such as training courses for advancements, remote work, and the option to work part-time, the need for workers to have to leave their current positions would decrease.
Frictional Unemployment: Social networking
Sometimes, the reason that a job isn't getting filled by an eligible worker is simply that the eligible worker is not aware that the job is available! Employers that post their jobs on job boards or online, for example, will fill a position quicker since the information regarding an open position was more accessible. People can't apply for positions if they aren't aware an employer is looking to get them filled.
Frictional Unemployment - Key takeaways
- Frictional unemployment occurs when individuals voluntarily choose to leave their job in search of a new one or when new workers enter the job market
- When the economy is doing poorly, the rate of frictional unemployment decreases
- Frictional unemployment is the most common and is seen as a sign of a healthy economy
- People who are between jobs, entering the workforce, or reentering the workforce are all frictionally unemployed
- Hidden unemployment is unemployment that is not counted when calculating the unemployment rate
- Lower unemployment benefits, more work flexibility, and social networking are ways to decrease the frictional unemployment rate
- The frictional unemployment rate can be calculated by dividing the number of frictionally unemployed people by the total labor force
References
- Figure 1. U.S Bureau of labor statistics, Table A-12. Unemployed persons by duration of unemployment, https://www.bls.gov/news.release/empsit.t12.htm
- Figure 2. U.S Bureau of labor statistics, Table A-12. Unemployed persons by duration of unemployment, https://www.bls.gov/news.release/empsit.t12.htm
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