What Is the Meaning of Frictional Unemployment?
Voluntary employment transfers in an economy can cause frictional unemployment. Workers leaving jobs and newcomers entering the economy produce temporary unemployment. Economic forces and labor migration may cause frictional unemployment, part of natural unemployment, in a developing, stable economy. Divide the number of active job seekers by the total labor force to get the frictional unemployment rate. Workers who quit, returners, and newcomers are the three main kinds of job seekers.
Frictional Unemployment factors
Labor Market Newcomers
First-time job seekers and recent graduates may lack the resources or efficiency to locate suitable employment. They avoid other labor to wait for better-paying ones. Temporary transitions, such as relocating to a new town or city, can also cause frictional unemployment since workers typically leave jobs before finding new ones.
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They are quitting to earn more, which causes frictional unemployment. Sometimes, workers quit to return to school or learn a new trade to make more money. Others may leave the workforce for family, health, retirement, or pregnancy reasons. Frictional unemployment occurs when workers return to work to seek work.
Looking for better or new jobs
Quitting without finding a new job shows that people “believe” the economy is strong enough to avoid unemployment. The “Quit Rate” has become a critical consumer confidence indicator recently. This tendency is also more common when people have saved enough to survive months of unemployment.
Benefits of unemployment
Government-paid unemployment benefits can promote frictional unemployment by allowing people to choose their next job, prolonging their joblessness. Companies may also not hire because they fear insufficiently competent candidates.
Frictional unemployment may indicate that people actively pursue better jobs, giving employers a bigger pool of competent candidates.
Frictional unemployment impact
All unemployment has downstream effects on companies and management. When frictional unemployment is high, firms may struggle to retain talent. Frictional unemployment implies workers may compare offers, wait for excellent prospects, and need corporate investment to stay.
Frictional unemployment also indicates economic health. When the economy is strong, and firms have more openings, employees are more likely to look for better jobs.
Last, frictional unemployment may affect lifestyles. Unemployment may encourage job hunting. Similar to how COVID-19 may have changed certain work habits, friction unemployment may make individuals want a bigger purpose and better jobs.
Frictional Unemployment Benefits
A free-moving labor force always has frictional unemployment, which is good since it shows people are actively pursuing better jobs. It also assists businesses by expanding their pool of highly qualified job applicants. It uses less government resources because it’s short-term.
Quickly connecting job applicants with opportunities reduces frictional unemployment. Workers can seek opportunities on social media and job-posting websites to speed up hiring.
Differences between frictional and other unemployment
Frictional unemployment is less concerning than cyclical unemployment, which is common during recessions and results from layoffs. Frictional unemployment drops in recessions because people hesitate to quit for better positions.
During particular seasons, workers may experience seasonal unemployment due to decreased demand. Specific jobs return with seasonal demand. Peak season frequently brings back many workers, ending seasonal unemployment.
A more severe kind of unemployment is structural unemployment. Fundamental economic developments, like industry shifts, cause this form of unemployment. Consider how eco-friendly solutions have replaced less eco-friendly ones. As consumer demand shifts to green solutions, less-desired industries lose jobs.
The US unemployment rate was 3.7% in November 2022. 1
Frictional unemployment, economic stimulus
Only frictional unemployment is mainly unaffected by government economic stimulation. The Federal Reserve Bank may cut interest rates to promote borrowing during weak economic times. The increased money should boost consumer and business expenditures, reducing unemployment. However, more money doesn’t solve frictional unemployment, except possibly by giving people the guts to become jobless while looking for work. As said, a tough economy would likely prevent such a move.
The leading cause of frictional unemployment
In a well-functioning economy, voluntary job changes produce frictional unemployment. People leaving their jobs for better compensation, opportunity, or work-life balance can generate frictional unemployment.
Why is frictional unemployment bad?
Frictional unemployment may be challenging for companies since workers are more ready to quit. Top achievers may leave if companies don’t invest in them. Frictional unemployment may also challenge job seekers. More willingly seeking employment may increase competition, making it harder for workers to obtain new jobs.
How Are Frictional and Cyclical Unemployment Different?
Employment fluctuates with the economy. Job creation and employment increase as the economy grows. Cyclical unemployment may result from job losses when the economy cools. However, frictional unemployment is shared in good economies. Frictional unemployment occurs when people actively pursue professional and life improvements.
Frictional unemployment occurs naturally in a healthy economy. Workers may pursue better prospects, return to school, care for family, or enhance their lives outside of work. Though less persistent than structural or cyclical unemployment, frictional unemployment nonetheless hurts the economy.
- Economic voluntary employment transfers cause frictional unemployment.
- Growing, stable economies have frictional unemployment.
- Moving between jobs and new hires causes frictional unemployment.
- Frictional unemployment can also result from prioritizing family, school, or purpose.
- Cyclical and structural unemployment are different from frictional unemployment.