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Is frictional unemployment a sign that the economy isn't doing well? It's actually the opposite. Most people who are unemployed are part of the frictionally unemployed group. This is a sign that the supply of labor is matching the demand and is thought to be a positive occurrence. Of course, if the rate gets to be too high, then this could be harmful to the economy. However, in the short-term it's considered to be beneficial. To learn the meaning of frictional unemployment, the causes and effects, and the theories as well, continue reading below.
When people leave their current job to find a new one or are seeking their first-ever job, then this is called frictional unemployment. This type of unemployment is the most common and is usually short-term. It's also a sign of a healthy economy rather than an unhealthy one and is part of natural unemployment.
Natural unemployment is a hypothetical rate of unemployment suggesting that there will never be zero unemployment in an economy that is operating well. It's the sum of frictional and structural unemployment.
But why is unemployment considered to be a sign of a healthy economy? Well, a strong and healthy economy would allow for people to switch jobs (if they so desire) without fear that they will remain jobless because they cannot find a new or more suitable position. While they will be jobless for a short period of time, they are confident that there will be another job with comparable pay available for them.
Frictional unemployment occurs when individuals voluntarily choose to leave their job in search of a new one or when new workers enter the job market.
Frictional unemployment is usually considered to be a voluntary type of unemployment meaning that the person is currently unemployed by choice. However, those who left willingly along with those who left unwillingly are all counted as frictionally unemployed. Let's review some examples of the types of people counted as frictionally unemployed:
By looking at graphs that show the duration of unemployment during a certain period of time and contrasting it with a later time, you can usually tell which part is the frictional unemployment rate due to its short duration. Let's take a look at the percentage rates for different durations of unemployment in the United States for March of 2021 and compare it to March of 2022.
Figure 1. US unemployment rate March 2021, StudySmarter Originals.
Figure 2. US unemployment rate March 2022, StudySmarter Originals.
Let's start by looking at the pink slice of the data chart pie in Figure 1 and comparing it to Figure 2. The pink slice of the pie represents those who were unemployed for less than 5 weeks, and this short period of time is most likely frictional unemployment. In Figure 1 the rate of those that were unemployed for less than 5 weeks was 14.4%, and that number jumped to 28.7% in Figure 2. That's double the previous year's rate!
There is a way to calculate the frictional unemployment rate. But first, you have to know the sum of the three categories of frictional unemployment and the total labor force.
The three categories of frictional unemployment are:
Labor force is the combination of employed and unemployed workers who have the willingness and ability to work.
All of these put together would give us the total number of frictionally unemployed people. We can then input the numbers we have into the equation below:
Imagine you're asked to calculate the frictional unemployment rate for Country Z. The table below shows the data you are to use in your calculation.
| Labor Market Information | # of people |
| Employed | 500,000 |
| Frictionally unemployed | 80,000 |
| Structurally unemployed | 5,000 |
Using the frictional unemployment rate formula, how would you solve this?
Step 1
Find the # of frictionally unemployed people.
Frictionally unemployed = 80,000
Step 2
Calculate the # of people in the labor force.
Labor force = Employed + Frictionally unemployed + Structurally unemployed
= 500,000 + 80,000 + 5,000
= 585,000
Step 3
Divide the number of frictionally unemployed people by the # of people in the labor force.
Step 4
Multiply by 100.
13.7% is the rate of frictional unemployment!
Included below are the usual causes of frictional unemployment:
During times of economic instability, the rate of frictional unemployment decreases. Employees fear they might not find another job so they remain at the one they're at until the economy heals enough for them to leave.
While not always negative, frictional unemployment does have certain disadvantages. For example, if an employee is fired and is now looking for a new job, they might run into financial difficulties. Their income has been significantly reduced and there's a possibility they can fall behind on bill payments and fall into debt.
Another risk of frictional unemployment is that the person might remain unemployed for longer than they were expecting or ready for. If an employee left their job because they were not happy with their working conditions, for example, and now are having difficulty finding a job, they run the risk of losing confidence. While this doesn't seem too detrimental at first, this could lead to this person becoming a discouraged worker.
Discouraged Worker
Discouraged workers are people who have grown discouraged (hence the name) in finding a job. They stop their search and therefore are no longer considered part of the labor force.
Frictional unemployment can result in discouraged workers. Discouraged workers fall under the umbrella of hidden unemployment, which is unemployment that is not counted when calculating the unemployment rate.
The unemployment rate is usually represented by a percentage and informs us of how many people in the labor force are jobless but currently seeking employment.
Other people who are considered part of the hidden unemployment group are those who are working fewer hours than they would like or are working jobs that they are overqualified for. The reason some people accept jobs that they are overqualified for is because they are waiting to hear back from another, better job. This is also known as wait unemployment. In theory, this type of unemployment might be seen as beneficial because at least the person has a job, right? But since the person accepted a job they are overqualified for, they are also most likely getting underpaid for the work they do.
To learn more about unemployment in general and how to calculate unemployment rate check our explanation on Unemployment
Imagine a law student in New York who just graduated. They send out applications to huge law firms that they know pay well but are extremely competitive. They know from others they've talked to that it takes months to hear back from these law firms due to so many applications constantly pouring in. Since the recent grad has loans to pay back and other bills to pay, they accept a job busing tables at a nearby restaurant to earn some money. They're overqualified for this position, but they're waiting to hear back. In the meantime, they are getting paid minimum wage and are now struggling to make ends meet. Since they technically have a job, they cannot be counted as unemployed.
Frictional unemployment theories generally focus on a few ways to "control" frictional unemployment, but the reality is that these would simply influence more people to find jobs quicker instead of spending as much time as they currently do staying unemployed. This would mean they're still frictionally unemployed, but for a shorter period of time. Let's explore some of the ways this can be controlled:
If a person decides to apply for unemployment, they will be collecting benefits as long as they don't have a job. For some, this might encourage them to take their time finding a new job since they have incoming funds. A way to shorten the time spent being in between jobs would be to reduce the unemployment benefits given. This could instead encourage people to find a new position faster since their income is reduced. However, a downside to this could be that in the rush to find a new position, they end up taking any job, even if it's one they're overqualified for. This would just add more people to the hidden employment group and is probably not the best course of action.
Some of the reasons that people leave their jobs are because of better opportunities, relocation, or the hours that they want to work not being available. By being more flexible and offering options such as training courses for advancements, remote work, and the option to work part-time, the need for workers to have to leave their current positions would decrease.
Sometimes, the reason that a job isn't getting filled by an eligible worker is simply that the eligible worker is not aware that the job is available! Employers that post their jobs on job boards or online, for example, will fill a position quicker since the information regarding an open position was more accessible. People can't apply for positions if they aren't aware an employer is looking to get them filled.
Frictional unemployment is when people leave their current job to find a new one or are seeking their first-ever job.
An example of frictional unemployment would be a recent college graduate searching for a job so they can enter the workforce.
It can be controlled by lowering unemployment benefits, allowing for more flexibility at work, and social networking to inform possible applicants of new job openings.
Some causes of frictional unemployment include:
Short-term, frictional unemployment is usually a sign of a healthy economy! It allows people to change jobs without fear that they will remain jobless, and so they find jobs better suited for them and leave their old position to get filled by another. It also allows employers to gain more qualified employees for the positions that are open.
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