Frictional unemployment is the result of voluntary job transitions. Continue reading this article to get a complete insight into frictional unemployment.
Unemployment is a key economic indicator because it indicates workers’ ability (or inability) to find gainful work and contribute to the economy’s productive output. People who leave the workforce for other reasons, such as retirement, higher education, or disability, are omitted. With more unemployed workers, the total economic output will be lower than it would have been otherwise.
During their unemployment, unemployed workers must maintain at least subsistence consumption. This means that a high-unemployment economy has lower output without a proportional decrease in the need for actual consumption.
High persistent unemployment can indicate severe economic distress and social and political upheaval. On the other hand, a low unemployment rate suggests that the economy is more likely to be operating at or near capacity, maximizing output, driving wage growth, and gradually raising living standards. On the other hand, deficient unemployment can be a warning sign of an overheating economy, inflationary pressures, and challenging conditions for businesses needing additional workers.
While the definition of unemployment is straightforward, economists classify unemployment into a plethora of subcategories. Voluntary and involuntary unemployment are the two broadest types of unemployment. When a person is unemployed voluntarily, they leave their job willingly searching for another position. When it is involuntary, a person has been fired or laid off and must seek new employment.
Frictional unemployment is the result of voluntary employment transitions within an economy. it naturally occurs, even in a growing, stable economy. Continue reading the article for a complete insight into Frictional unemployment.
What is Unemployment?
Unemployment refers to a situation in which a person actively looking for work cannot find a job. Unemployment is regarded as a critical indicator of the economy’s health. The unemployment rate, which is the number of unemployed people divided by the number of people in the labor force, is the most commonly used measure of unemployment. Many governments provide unemployment insurance to certain unemployed people who meet specific criteria.
Unemployment is defined very precisely by the Bureau of Labor Statistics (BLS). Out-of-work employees must have three characteristics to be counted as unemployed:
- They are not working, not even part-time or temporarily.
- They are willing to work.
- In the last four weeks, they actively sought employment.
This last point is critical and frequently contentious. If a person stops looking for work, the BLS no longer considers them in the labor force or unemployed. It does, however, report them separately as “marginally attached to the labor force.” These are people who have looked for work in the previous 12 months but not in the last four weeks.
Divide the number of unemployed people by the number of people in the labor force to get the unemployment rate.
Types of Unemployment
Digging more profound, voluntary, and involuntary unemployment can be broken down into four types.
When people voluntarily change jobs within an economy, frictional unemployment. It takes time for a person to find another job after leaving a company. Similarly, recent graduates who are just entering the labor force contribute to frictional unemployment. This type of unemployment is usually temporary. It is also the least problematic in terms of economics. Frictional unemployment is a natural result of market processes taking time and information being expensive. Finding a new job, recruiting new employees, and matching the right workers to the right jobs all take time and effort, resulting in Frictional unemployment.
Cyclical unemployment is the component of overall unemployment caused directly by economic ups and downs. Typically, unemployment rises during recessions and falls during economic expansions. The goal of the various policy tools that governments use to stimulate the economy is to reduce cyclical unemployment during recessions, which is a significant motivation for studying economics.
Cyclical unemployment refers to the irregular ups and downs or cyclical trends in growth and production as measured by GDP that occurs during the business cycle. Most business cycles eventually reverse, with the downturn giving way to an upturn, followed by another downturn.
Economists define cyclical unemployment as the result of businesses not having enough labor demand to employ everyone looking for work at that point in the business cycle. When demand for a product or service falls, supply production may fail to compensate. As supply levels fall, fewer employees are needed to meet the lower standard of production volume. Workers will be laid off, especially those that the company no longer requires.
When economic output falls, the business cycle weakens, and cyclical unemployment rises. Conversely, When business cycles are at their peak, cyclical unemployment tends to be low because of the high demand for labor.
Cyclical unemployment breeds more cyclical unemployment, meaning workers laid off have less money to spend on the goods and services they require. This reduces demand even further. Government intervention in expansive monetary and fiscal policy is needed to break the downward spiral. The government did not intervene immediately after the 1929 stock market crash. This delay resulted in the Great Depression, which lasted ten years and resulted in a 25% unemployment rate.
Structural unemployment is a type of long-term unemployment caused by fundamental economic shifts and exacerbated by external factors such as technology, competition, and government policy. Structural unemployment occurs when workers lack the necessary job skills or live too far away from areas where jobs are available and are unable to relocate. Appointments are available, but there is a significant mismatch between what employers require and what workers can provide.
Other than the business cycle, structural unemployment is caused by forces other than the business cycle. This means that structural unemployment can last for decades and that radical change may be required to correct the situation. If structural unemployment is not addressed, it can raise the unemployment rate long after the recession has ended and raised the natural rate of unemployment, which is referred to as “frictional unemployment.
Long-term recessions frequently result in structural unemployment. If workers are out of work for an extended period, their skills will likely become obsolete. They may remain unemployed even after the economy recovers unless they are willing and able to accept a lower-level, unskilled job. If this occurs, structural unemployment increases the rate of natural unemployment.
Over the last three decades, hundreds of thousands of well-paying manufacturing jobs have been lost in the United States as production jobs have migrated to lower-cost areas in China and elsewhere. The decrease in employment is to blame for a higher natural unemployment rate.
Growing technology in all areas of life raises the prospect of future structural unemployment because workers with insufficient skills will be marginalized. Given the high rate of technological obsolescence and the growing use of artificial intelligence, even those with skills may face redundancy (AI).
The phenomenon of the industry’s replacement of machinery workers with robots is an example of Structural Unemployment. Workers must now learn how to manage the robots that have replaced them. Those who do not understand must be retrained for alternative jobs or face long-term structural unemployment.
Long-term or permanent institutional factors and incentives in the economy cause institutional unemployment. All of the following factors can contribute to institutional unemployment:
- Government policies such as high minimum wage floors, generous social benefit programs, and restrictive occupational licensing laws are examples of government policies.
- Labor market phenomena such as efficient wages and discriminatory hiring
- Labor market institutions such as high unionization rates
How to measure unemployment
In the United States, the government tracks unemployment through surveys, census counts, and the number of unemployment insurance claims.
The United States Census Bureau conducts the Current Population Survey (CPS) on behalf of the Bureau of Labor Statistics (BLS) to produce the preliminary estimate of the nation’s unemployment rate. Since 1940, this survey has been conducted every month. The sample consists of approximately 60,000 eligible households, equating to about 110,000 people each month. One-fourth of the households in the model are changed each month to improve the reliability of the estimates; this occurs so that no family is represented for more than four consecutive months.
There are numerous variations of the unemployment rate, each definition of unemployed and in the labor force. According to the BLS, the official unemployment rate is the U-3 unemployment rate (the total unemployed percentage of the civilian labor force). This definition, however, excludes discouraged unemployed workers who have given up looking for work. Other types of unemployment include discouraged workers and part-time or underemployed workers who want to work full-time but cannot do so due to financial constraints.
What is Frictional unemployment?
Voluntary job transitions within an economy cause frictional unemployment. Even in a growing, stable economy, frictional unemployment occurs. Workers who choose to leave their jobs searching for new ones and those who enter the labor force for the first time constitute frictional unemployment. It excludes workers who stay in their position until they find a new one because they are never unemployed.
Frictional unemployment exists in the economy at all times. It contributes to the overall employment picture and is a component of natural unemployment, the lowest unemployment rate in an economy due to economic forces and the labor movement. Natural unemployment also reflects the number of unemployed workers involuntarily, whether due to a lack of skills or replacement by technology.
Frictional unemployment occurs when students look for their first job or mothers return to work. It also happens when employees are fired or, in some cases, laid off for business-related reasons, such as a plant closure. Frictional unemployment is a temporary state that occurs due to the job search process. Frictional unemployment is good for the economy, as it allows workers to move to jobs where they can be more productive.
Understanding Frictional unemployment
The frictional unemployment rate is calculated by dividing the labor force by the number of workers actively looking for work. Workers actively looking for work are typically divided into three groups: those who have left their jobs, returning to the workforce, and new entrants.
Recent graduates and other first-time job seekers may lack the resources or efficiency to locate a company that has an open and suitable position for them. As a result, they don’t take other jobs, preferring to wait for a better-paying place. Quick transitions, such as moving to a different town or city, will also contribute to frictional unemployment, as there is often a time lag between when workers quit their job and when they find a new one.
Others may leave the labor force for personal reasons such as caring for a family member, illness, retirement, or pregnancy. When workers return to the labor force to look for work, they are classified as having frictional unemployment. People quitting their jobs without having another one lined up indicates that they “believe” the economy is strong enough that they will not be laid off. The “Quit Rate” has become a closely followed indicator of consumer confidence in recent years.
To illustrate this point, the Quit Rate in 2019 reached its highest level since the Bureau of Labor Statistics began tracking it in 2000. According to Gallup, 2.3 percent of employees quit their jobs that year. The economic crisis struck at the end of the first quarter of 2020, and the national quit rate fell to 1.4 percent. However, by May 2021, it had risen to an even higher 2.5 percent.
Government-paid unemployment benefits can sometimes lead to frictional unemployment because the income allows workers to be picky about their next job, lengthening their time out of work. It can also happen due to companies refusing to hire because they believe there aren’t enough qualified people available for the job.
Frictional unemployment is advantageous because it indicates that workers actively seek better opportunities, providing businesses with a larger pool of qualified potential employees.
Causes of Frictional unemployment
Workers’ concerns about salaries, benefits, work location, job responsibilities, and so on may force them to leave their current position in search of something that better meets their updated expectations. However, it takes them longer than expected.
It takes time to find the right job and begin working. These time lags can occur for a variety of reasons, including:
- Information searching
- Recruitment and negotiation processes
- No urgency to get a new job
Workers may not always have complete information about where job openings can be found. Vacancies may exist, but they do not require their skills. They may need to Google several companies that have openings. In this case, the presence of online job fairs like JobStreet speeds up the process of finding the right job.
Selection and negotiation process
A mismatch between workers and available jobs is expected. If this happens, it is referred to as frictional unemployment. The problem can disproportionately affect new or re-entry-level workers in the labor market. This is usually the result of an employee’s natural career progression and transition to a new job, industry, or role.
For example, you may come across a job you believe is a good fit for you. However, you may still need to undergo several processes, such as medical tests, interview tests, and compensation negotiations. Assume you’ve completed all of the steps and have arrived at the salary negotiation stage. You may request a higher salary than the employer anticipates. The employer will not hire you.
As a result, you will be unemployed for a short period until you find the right employer. This expectation extends beyond salary to selecting and negotiating annual bonus compensation, work time, and work location.
No sense of urgency
It often occurs that a person might be looking for a better-paying job, and in hopes of finding it, they quit their job after saving enough money to cover them for a while. But this results in them not feeling any urgency to find another job because they know they have their savings to fall back on. This process ensures that they remain in the unemployment category for a while.
Following are some of the other causes of frictional unemployment include:
- An employee leaves their current job before finding a new job to replace it with
- An employee has to move to another location
- An employee moves to be closer to their partner’s job
- An employee takes time off to care for a loved one
- An employee leaves an unfulfilling position
- An employee has the financial means to take time off from a full-time job
- A person pursues higher education and leaves their job to do so
- There is a disconnect between individuals and available jobs
- An employee is dissatisfied with their current working conditions
It’s important to note that the rate of frictional unemployment decreases during recessions because employees are often afraid to leave their positions due to a lack of other job options.
The trend during a business cycle
During a recession, frictional unemployment usually decreases. Some employees are afraid to quit and look for new jobs. They are aware that job openings are dwindling, and challenging to find new employment. As a result, they will remain even if the employer reduces wages with the efficiency measures implemented. However, due to rising unemployment cycles, the overall unemployment rate increased during this period.
In contrast, when the economy is doing well, labor demand rises. Employers struggle to find qualified candidates due to high demand. Workers are more likely to quit their jobs to pursue better opportunities during this period. Frictional unemployment rises as a result.
Impact on the economy
Frictional unemployment is relatively benign to the economy in the short term. It’s just a matter of time before you find the right job.
An increase in frictional unemployment can sometimes indicate an improvement in worker quality. Workers want to change jobs because they want a higher salary due to their increased expertise. As a result, high frictional unemployment, in this case, indicates a more excellent supply of qualified workers. However, if the unemployment rate remains high in the long run, workers will be dissatisfied. Worker productivity can suffer as a result of extended periods of unemployment.
Many economists consider reasonable frictional unemployment a good thing for the economy. It gives businesses a more comprehensive range of human capital options.
Companies may gain access to more qualified employees due to frictional unemployment. If job seekers take a long time to find a new job, this phenomenon can have negative consequences. In this case, job seekers will become increasingly dissatisfied, potentially leading to decreased productivity. Furthermore, prolonged frictional unemployment may result in a decrease in economic output.
How to overcome Frictional unemployment?
As previously stated, if frictional unemployment exceeds certain reasonable levels, the economy may suffer. As a result, regulators should watch unemployment rates and take the necessary steps to address the problem. Following are the actions that regulators can take to keep naturally occurring unemployment at acceptable levels:
Increase the information transmission between job-seekers and employers
One of the primary causes of rising frictional unemployment is a lack of information transfer. The use of mediums (such as social networks and online job boards) that allow for faster information exchange will reduce the time it takes to match job seekers and employers, resulting in lower unemployment. People are less likely to learn more about available positions when they are unaware of them. It is critical to improving information about open jobs to increase overall employment rates. Employers can accomplish this through various channels, including online job boards, social media platforms, and advertising campaigns. The faster potential employers and job seekers exchange job information, the sooner they find positions that match their needs and qualifications.
Resist prejudice against workers, jobs, or locations
Regulators should combat existing discrimination by making specific jobs or sites more appealing.
Enhance job flexibility
Regulators may encourage employers to give prospective employees more flexibility to make available jobs more appealing to job seekers.
Advantages of Frictional unemployment
Frictional unemployment exists in every economy with a free-moving labor force and is beneficial because it indicates that people are actively seeking better jobs. It also benefits businesses by providing a larger pool of potentially highly qualified candidates to choose from when filling positions. Because it is only temporary, it does not significantly strain government resources.
Frictional unemployment is reduced by quickly matching prospective job seekers with job openings. Because of the internet, workers can use social media and job-posting websites to search for jobs, leading to faster hiring turnaround times.
Frictional unemployment vs. Cyclical unemployment
Frictional unemployment is less concerning than cyclical unemployment, which occurs during a recession and is caused by businesses laying off workers. In a recession with rising unemployment, frictional unemployment tends to fall because workers are usually afraid to leave their jobs searching for a better one.
Frictional unemployment vs. Seasonal unemployment
While both frictional and seasonal unemployment is voluntary, there are some significant differences:
- While frictional unemployment refers to people who are “between jobs,” seasonal unemployment refers to those who work in jobs that are only active during certain seasons, such as working on a political campaign or driving a snowplow.
- Both frictional and seasonal unemployment indicate future employment opportunities, but those frictionally unemployed are typically looking for a job change that matches their skills. Those seasonally unemployed are affected by a decrease in demand for their labor, which leads to their unemployment.
Frictional unemployment is the only type of unemployment largely unaffected by government economic stimulus. For example, the Federal Reserve Bank may lower interest rates to encourage borrowing during difficult economic times. The hope is that the additional funds will stimulate consumer and business spending, resulting in growth and reducing unemployment. However, extra money does not address the underlying causes of frictional unemployment, except perhaps by giving some workers the courage to become unemployed while looking for a new job. Nonetheless, as previously stated, a challenging economic environment would most likely preclude such a decision.
One way to reduce frictional unemployment is to provide more accurate job-vacancy information. The internet now facilitates the flow of such information. Not only do some sites list the types of vacancies available and the expertise required, but some also list the salaries offered by employers. Of course, such websites will shorten salary negotiations during interviews. Governments can also improve labor mobility. For example, they provide incentives to employers who provide prospective employees with the flexibility to enhance and diversify their knowledge and expertise. As a result, employees have other skills to fall back on if they are fired if a company goes bankrupt or closes,