What Is Frictional Unemployment?

Frictional unemployment is the result of employment transitions within an economy. Frictional unemployment naturally occurs even in a growing, stable economy. Workers leaving their jobs or new workers entering the workforce both add to frictional unemployment.

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Frictional Unemployment

Understanding Frictional Unemployment

Frictional unemployment is always present in the economy, resulting from temporary transitions made by workers and employers. Frictional unemployment is part of the overall employment picture, including natural unemployment, which is the minimum unemployment rate in an economy due to economic forces and voluntary movement of labor. However, natural unemployment reflects the number of workers that are not employed because of a lack of skill or were replaced by technology. Frictional unemployment, on the other hand, is from voluntary moves by workers but is included in natural unemployment since it represents the minimum level of unemployment in an economy.

Key Takeaways

  • Frictional unemployment is the result of employment transitions within an economy.
  • Frictional unemployment naturally occurs even in a growing, stable economy.
  • Workers leaving their jobs or new workers entering the workforce both add to frictional unemployment.

Causes of Frictional 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.

Recent graduates from school or first-time job seekers may lack the resources or efficiency for finding the company that has the job that is available and suitable for them. As a result, they don't take other work, temporarily holding out for the better-paying job.

Temporary transitions such as moving to another town or city will add to frictional unemployment since there is often a gap in time between when the workers quit their job and find a new one. In other words, these workers don't have another job lined up before quitting their current job.

Workers quitting their job to look for better pay adds to frictional unemployment. In other cases, workers may resign from their job to go back to school or learn a new skill because they believe they need the skill to earn more income.

Others might leave the workforce for personal reasons such as to care for a family member, sickness, retirement, or pregnancy. When the workers return to the workforce to look for a job, they're counted as part of frictional unemployment.

Unemployment benefits paid by the government can sometimes lead to frictional unemployment since the income allows workers to be selective in finding their next job, further adding to their time unemployed.

Frictional unemployment can also occur due to companies abstaining from hiring because they believe there are not enough qualified individuals available for the job when in actuality, there are leading to workers leaving a company for another job.

Effects of Frictional Unemployment

Although counterintuitive, frictional unemployment is beneficial to an economy since it's an indicator that individuals are seeking better positions. Frictional unemployment is not as much of a concern as other types of unemployment since it's typically the result of a worker's choice. Frictional unemployment also helps businesses since they have a wider selection of potentially highly qualified candidates applying for positions.

Frictional unemployment is short-term, and as a result, does not place much of a drain on government resources. Frictional unemployment always exists in an economy with a free moving labor force. 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.

Frictional Unemployment and Recessions

Frictional unemployment is not as concerning as cyclical unemployment. Cyclical unemployment is predominant in a recession and is caused by businesses laying off employees. Workers have no choice but to leave their jobs with cyclical unemployment while frictional, workers have made a choice to leave. However, in a recession with unemployment rising, frictional unemployment tends to decline, because workers are usually afraid to leave their jobs to try and find a better one.

Reducing Frictional Unemployment

Frictional unemployment can be reduced by quickly matching prospective job seekers with job openings. With advances in the internet, workers can use social media and job posting websites to search for jobs, which can lead to quicker turnaround times in getting hired; thus reducing the frictional unemployment rate.

Frictional unemployment is the only form of unemployment that isn't reduced or affected by economic stimulus from the government of the Federal Reserve Bank's monetary expansion. The Fed might lower interest rates, for example, to encourage borrowing in the economy. The added money from borrowing tends to produce more spending by consumers and businesses, leading to growth and a reduction in unemployment.