Frictional and structural unemployment are two different types of unemployment that occur in an economy. Frictional unemployment is not a direct result of economic factors and occurs when workers search for jobs. Conversely, structural unemployment is caused by shifts in the economy, which makes it difficult for workers to find employment.

Unemployment is measured by the unemployment rate. But because frictional unemployment is voluntary and not directly related to the economy, economists tend to factor it out when calculating the unemployment rate.

Frictional Unemployment

Frictional unemployment occurs during a period when workers are searching for new employment or transitioning from their old jobs to new ones. It can also be referred to as natural unemployment because it is not directly related to factors that lead to an underperforming economy.

Frictional unemployment is voluntary and is a direct result of temporary transitions in employment. This includes new people who are entering the workforce, anyone who moves to find work in a different city, or people who quit their jobs to find other work. Workers may also choose to remain unemployed rather than take the first job they are offered. Thus, frictional unemployment is usually present in an economic system because some people always search for new jobs.

Consider a recent college graduate who is searching for a job. He may not expect to find a job within a year of graduating due to his lack of experience. However, he gets offers for jobs that are not in the field he studied. Since the offers are not the type of work he is looking for, he rejects these offers. Therefore, this period is known as frictional unemployment.

Frictional unemployment can also occur because of actions from employers. For instance, employers may feel as though there are not enough qualified candidates to fulfill certain positions.

Because there will always be people in these kinds of situations, many economists remain unconcerned about frictional unemployment, since there is no way to stop it from happening. They realize that frictional unemployment is temporary and does not put a strain on government resources like social assistance or unemployment benefits. But it is a good sign for the economy, as it demonstrates that people are looking for higher-paying, better quality jobs.

Cyclical unemployment is a result of the business cycle, where unemployment rises during recessions and declines with economic growth.

Structural Unemployment

Contrary to frictional unemployment, structural unemployment is a type of long-term unemployment caused by shifts in the economy. It occurs when there is an oversupply of jobs and people are willing to work, but the people searching for work are not qualified.

One of the reasons behind structural unemployment is technological advances and decline in an industry. Technological advances can cause some types of skilled laborers to become obsolete. Assume a data analyst at an investment bank has been working in the field for over 20 years. But he never kept up with technological advances and did not learn to program. His job is easily programmable, and programs can analyze big data faster than he did. Since the worker is not qualified for other data analyst jobs, which require extensive programming skills, he experiences structural unemployment.

Structural unemployment can also be caused by a decline in an industry. For example, assume the prices of crude oil have been on the decline over the past year. Therefore, shale oil drilling companies have also been on the decline, losing money on their total investments due to the weakened oil industry. To combat operating at a loss, the shale oil drilling companies must lay off many of their workers. The skilled workers in the drilling field do not have the skills to perform other jobs in emerging industries and markets. Consequently, the decline in this industry can lead to structural unemployment.

Because structural unemployment is a direct result of the economic cycle, economists and analysts take it very seriously. If not addressed, this type of unemployment can last for years, even decades, and can increase a nation's unemployment rate.

Key Takeaways

  • Frictional unemployment has nothing to do with the economic cycle and is voluntary, where people transition between jobs.
  • Structural unemployment is a direct result of shifts in the economy including changes in technology or declines in an industry.
  • Frictional unemployment is typically a temporary phenomenon, while structural unemployment can last years.
  • Economists are concerned with structural unemployment and do not factor frictional unemployment into the unemployment rate.