What is 'Frictional Unemployment'
Frictional unemployment is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information. For example, a first-time job seeker may lack the resources or efficiency for finding the company that has the job that is available and suitable for him and as a result does not take other work, temporarily holding out for the better-paying job. Another example of when frictional employment occurs is when a company abstains from hiring because it believes there are not enough qualified individuals available for the job, when in actuality there is.
BREAKING DOWN 'Frictional Unemployment'
Frictional unemployment can be reduced by quickly matching prospective job seekers with job openings of interest. This is accomplished through the transmission of information. Through social media and job posting websites, individuals looking for jobs may now experience a quicker turnaround to get hired. This reduces the frictional unemployment level.
Frictional unemployment is the only form of unemployment that will not be reduced through monetary expansion. In fact, if monetary expansion occurs, more job openings will occur, thus potentially resulting in an increase of functional unemployment.
The time, energy and monetary cost of searching for a new job is called friction. Friction is an unavoidable feature during the job search process. Friction is a natural part of seeking new employment, but friction is typically short-term. Although job seekers often retain their current position while seeking new employment, friction occurs due to uncontrollable situations when that luxury is not an option.
Trends of Frictional Unemployment
When the economy enters into a recession, frictional unemployment tends to decline. This is a result of workers being afraid to leave their current positions in search of new ones. However, the overall level of unemployment still decreases due to cyclical unemployment and people leaving their jobs, whether it is their choice or not.
Effects of Frictional Unemployment
Frictional unemployment is beneficial to the economy. It is an indicator that individuals are seeking better positions. Because frictional unemployment may result by the worker's choice, this form of unemployment is not as severe as others. In fact, frictional unemployment results in businesses having a greater selection of potentially highly qualified candidates applying for positions.
Frictional Unemployment Calculation
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: job leavers, people coming back into the job force and new entrants coming into the job force.