What Is Frictional Unemployment? Causes & Examples
What Is Frictional Unemployment? Causes & Examples. Frictional unemployment is a type of unemployment that arises when workers are searching for new jobs or are transitioning from one job to another. It is part of natural unemployment and hence is present even when the economy is considered at full employment.
Workers moving from job to job and new workers entering the workforce contribute to frictional unemployment. Frictional unemployment occurs in a growing, stable economy and Frictional unemployment is the result of voluntary employment transitions within an economy.
To estimate the unemployment rate, the U.S. Bureau of Labor Statistics (BLS) uses data on the employment status of the U.S. population from a monthly survey of approximately 60,000 households. A person must have no job and must actively be seeking a job to be considered unemployed.
If they are not actively searching for a job, they are not considered part of the labor force and are not counted in the unemployment rate.
What are the Advantages of Frictional Unemployment?
Frictional unemployment always exists in an economy with a free-moving labor force and is beneficial because it’s an indicator that individuals are seeking better positions by choice. It also helps businesses because it gives them a wider selection of potentially highly qualified candidates applying for positions.
What Are The Causes of Frictional Unemployment?
1. Workers’ dissatisfaction with work conditions
Workers’ anxiety towards salaries, benefits, work location, job responsibilities, etc. may force them to quit their current job, and look for something that better meets their updated expectations.
2. A mismatch between the workers and available jobs
If there is a mismatch between job-seekers and available jobs in the market, that is considered frictional unemployment. The issue can especially affect the new entrants or re-entrants to the job market. This is generally due to the natural career progression for an employee, and their natural transition to a new job.
Other causes of frictional unemployment are:
- 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.
- An employee doesn’t feel fulfilled at their current position and leaves to find a new position.
- An employee has to move for personal reasons.
- An employee wants to go back to school and further their education.
- An employee feels that if they switch jobs they would have better opportunities.
- A person leaves to take care of sick family members or are sick themselves.
What are the impacts of frictional unemployment?
1. The economy benefits.
When frictional unemployment is at its highest, it means the economy is doing well. A healthy economy is a good thing — businesses and people alike reap the benefits.
2. Employers can struggle to retain talent.
For organizations, this means investing in the employee experience is more important than ever. Companies everywhere are trying to meet their employees’ needs. At the end of the day, it’s about keeping your employees happy.
3. People have more potential to live with purpose.
If people are frictionally unemployed, it’s likely because of that underlying foundational cause: purpose.
4. The talent marketplace can become fiercely competitive.
Just like it’s easier to keep your talent, it can be harder to capture top talent, too. Right now, candidates are regularly fielding multiple offers. In today’s economy, it’s not uncommon for candidates to have the flexibility to weigh their options. For employers, this means that you better put your best foot forward.
Understanding Frictional Unemployment and comparing to other types of unemployment
The frictional unemployment rate is calculated by dividing the workers actively looking for jobs by the total labor force. The workers actively looking for jobs are typically classified into three categories: workers who left their job, people returning to the workforce, and new entrants. When the economy is doing poorly, the rate decreases.
What is Structural unemployment?
Structural unemployment is another type of unemployment. This type of unemployment occurs when there’s a structural change in the economy. For example, let’s look at the fossil fuel industry. With the emergence of clean and renewable energy sources, many fossil fuel companies are scaling back. Some are opting for more sustainable energy sources while others are feeling the impacts of layoffs.
What is Cyclical unemployment?
When you think of recessions, cyclical unemployment is probably what comes to mind. When the economy slows, hiring tends to follow. When companies reduce their hiring or lay off employees, it’s typical cyclical unemployment rises.
Examples of Frictional Unemployment
Frictional unemployment and structural unemployment are the two types of unemployment that naturally occur. This “natural” type of unemployment is calculated as the natural rate of unemployment.
For Example: 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 they’re waiting to hear back. In the meantime, they are getting paid minimum wage and are now struggling to make ends meet. They can now be considered as Frictionally unemployed.
Another Example: Recent graduates from school and other first-time job seekers may lack the resources or efficiency for finding a company that has an available and suitable job for them. As a result, they don’t take on other work, temporarily holding out for better-paying jobs. Temporary transitions—such as moving to another town or city—will also add to frictional unemployment.
Recommendation
