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Frictional Unemployment

Frictional Unemployment

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.

Frictional unemployment definition

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.

Examples of frictional unemployment

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:

  • People who leave their current job to find a better one
  • People who are entering the workforce for the first time
  • People who are reentering the workforce

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.

Frictional Unemployment US unemployment rate March 2021 StudySmarter Originals

Figure 1. US unemployment rate March 2021, StudySmarter Originals.

Frictional Unemployment US unemployment rate March 2022 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!

Calculating frictional unemployment

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:

  • Job leavers
  • Those reentering the workforce
  • Those entering the workforce for the first time

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
Employed500,000
Frictionally unemployed80,000
Structurally unemployed5,000

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!

Causes of frictional unemployment

Included below are the usual causes of frictional unemployment:

  • An employee doesn't feel fulfilled at their current position and leaves to find a new position
  • An employee feels that if they switch jobs they would have better opportunities
  • A person doesn't want to work full-time anymore and leaves to find a job with fewer hours
  • An employee is not happy with their current working conditions and leaves in search of a new position
  • A person leaves to take care of sick family members or are sick themselves
  • An employee has to move for personal reasons
  • An employee wants to go back to school and further their education

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.

Disadvantages of frictional unemployment

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.

Frictional Unemployment, A man laying his head on the table at work, StudySmarterDiscouraged 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: Hidden unemployment

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

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:

Frictional Unemployment: Reduce unemployment benefits

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.

Frictional Unemployment: More job flexibility

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.

Frictional Unemployment: Social networking

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 - Key takeaways

  • 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
  • When the economy is doing poorly, the rate of frictional unemployment decreases
  • Frictional unemployment is the most common and is seen as a sign of a healthy economy
  • People who are between jobs, entering the workforce, or reentering the workforce are all frictionally unemployed
  • Hidden unemployment is unemployment that is not counted when calculating the unemployment rate
  • Lower unemployment benefits, more work flexibility, and social networking are ways to decrease the frictional unemployment rate
  • The frictional unemployment rate can be calculated by dividing the number of frictionally unemployed people by the total labor force

References

  1. Figure 1. U.S Bureau of labor statistics, Table A-12. Unemployed persons by duration of unemployment, https://www.bls.gov/news.release/empsit.t12.htm
  2. Figure 2. U.S Bureau of labor statistics, Table A-12. Unemployed persons by duration of unemployment, https://www.bls.gov/news.release/empsit.t12.htm

Frequently Asked Questions about Frictional Unemployment

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:

  • Not feeling fulfilled at a current position
  • Better opportunities elsewhere
  • Wanting more/fewer hours than current  job is willing to provide
  • Leaving to take care of sick family members
  • Moving away
  • Going back to school

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.

Final Frictional Unemployment Quiz

Question

What is frictional unemployment?

Show answer

Answer

Frictional unemployment is when a person is unemployed but still actively looking for work. It could be a person who is in between jobs, for example, or who is getting their first-ever job. 

Show question

Question

What are 3 examples of frictional unemployment?

Show answer

Answer

  • People who are looking for a new job
  • People who are entering the workforce for the first time
  • People who are reentering the workforce

Show question

Question

What happens to the rate of frictional unemployment when the economy is unstable?

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Answer

It decreases. Workers aren't confident that they can find new jobs at this time. Therefore, they stay at the ones they currently have and wait until the economy is back to normal.

Show question

Question

Is frictional unemployment bad for the economy?

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Answer

Generally, no. Frictional unemployment (within reason) is seen to be a sign of a healthy economy. Workers feel confident that they will be able to find a new job with comparable pay even if they leave the job they currently have.

Show question

Question

Give 3 reasons someone might leave their job and become financially unemployed.

Show answer

Answer

  • An employee doesn't feel fulfilled
  • An employee wants better opportunities
  • A person doesn't want to work full-time anymore 
  • An employee is not happy with their current working conditions
  • A person leaves to take care of sick family members
  • An employee has to move
  • An employee wants to go back to school 

Show question

Question

What are discouraged workers?

Show answer

Answer

Workers who have given up on searching for a job. They may have started off as being frictionally unemployed, but at some point they felt that they're never going to get hired or get the job they want. They stop applying and looking for jobs and are therefore not even considered to be part of the labor force anymore.

Show question

Question

What's hidden unemployment?

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Answer

Employment that is not counted when calculating the unemployment rate. These are people who are technically unemployed but might have stopped searching for a job, such as discouraged workers, or are working jobs they are overqualified for. 

Show question

Question

Wait unemployment is...?

Show answer

Answer

When a person works a job they are overqualified for while waiting for the job they actually want to hire them. A good example would be a lawyer working a minimum wage job while waiting to hear back from a highly competitive law firm. 

Show question

Question

How can frictional unemployment be controlled?

Show answer

Answer

It can be controlled by lowering the amount of unemployment benefits, increasing social presence, and offering more flexibility when it comes to work. The more convenient it is for people to work or to find open job positions, the quicker they'll leave their unemployment days behind. 

Show question

Question

Why would increased job flexibility help control the rate of frictional unemployment?

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Answer

Increasing flexibility would allow workers to continue working without having to worry about the standard,  more rigid work structure that they currently have. For example, instead of worrying about running late to work in the morning due to traffic or other conditions outside of the workers' control, they can request to work from home. Or, if a worker is going to be moving soon, remote work could also allow them to continue working at their current job instead of having to find a new one.

Show question

Question

What information must be known before calculating the frictional unemployment rate?

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Answer

The # of frictionally unemployed people and the # of the total labor force. The # of frictionally unemployed people is calculated by adding together all of the people who are in between jobs, are reentering the workforce, and those who are attempting to enter the workforce for the first time.

Show question

Question

Why could lowering the unemployment benefits to control frictional unemployment possibly be a bad idea?

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Answer

While it would encourage people to find a job quicker, lowering the unemployment benefits could also make people find a job a bit too quickly. This is bad because in an attempt to find a job so they can pay their bills, they might accept a job they are overqualified and underpaid for. This leaves quality positions open that this person could have filled, so it's not necessarily a boost for the economy. 

Show question

Question

What is natural unemployment?

Show answer

Answer

Natural unemployment is a hypothetical rate of unemployment and suggests that there will never be zero unemployment in an economy that is operating well. Employees leaving their current posts to look for better opportunities and advancements is seen as a good thing.

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Question

Which of these is incorrect?



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Answer

Discouraged workers are part of the labor force. 

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Question

Which of the following is/are correct?

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Answer

all of the above

Show question

Question

Highlight the incorrect portion of the text: Natural unemployment is a hypothetical rate of unemployment suggesting that there will always be zero unemployment in an economy that is operating well.


Show answer

Answer

Natural unemployment is a hypothetical rate of unemployment suggesting that there will always be zero unemployment in an economy that is operating well.

Show question

Question

Which of the following is an example of frictional unemployment?

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Answer

people who are reentering the workforce

Show question

Question

What are the three categories of frictional unemployment?

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Answer

Job leavers, those reentering the workforce and those entering the workforce for the first time


Show question

Question

Use the table below to calculate frictional unemployment rate.


Labor Market Information# of people
Employed500,000
Frictionally unemployed80,000
Structurally unemployed5,000

Show answer

Answer

13.7%

Show question

Question

Which of the following could be a potential cause for frictional unemployment?

Show answer

Answer

An employee has to move for personal reasons and will need to look for another job

Show question

Question

A discouraged worker is someone who:

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Answer

someone who was previously looking for a job but no longer is due to being discouraged

Show question

Question

Discouraged workers fall under the umbrella of:

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Answer

hidden unemployment

Show question

Question

Highlight the incorrect portion of the text: The unemployment rate is usually represented by a percentage and informs us of how many people in the workforce union are jobless but currently seeking employment. 


Show answer

Answer

The unemployment rate is usually represented by a percentage and informs us of how many people in the workforce union are jobless but currently seeking employment. 

Show question

Question

Sara has recently left her job and returned back to school for six months. While she was in school she took up a part-time job as a Barista. Sara has recently graduated from her program and is in the job market looking for a full-time job in her field. Sara is a little apprehensive as to how long it will take her to find a new job in her field, so she decides to continue her part-time Barista job during her job search. Which of the following is true regarding Sara's situation?

Show answer

Answer

Sara is part of hidden unemployment

Show question

Question

When individuals voluntarily choose to leave their job in search of a new one, they are considered --------------------- unemployed.


Show answer

Answer

frictionally 

Show question

Question

Gabe doesn't like his current job and has decided to quit. Will Gabe considered frictionally unemployed if he quits his job?

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Answer

Yes, Gabe will be considered frictionally unemployed

Show question

Question

Risk of frictional unemployment is that the person might remain unemployed for longer than they were expecting or ready for.

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Answer

TRUE

Show question

Question

A discouraged worker is everyone in the labor force who is not happy with their current job.

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Answer

FALSE

Show question

Question

What is the unemployment rate?

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Answer

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. 


Show question

Question

What is the labor force?

Show answer

Answer

Labor force is the combination of employed and unemployed workers who have the willingness and ability to work.

Show question

Question

What is natural unemployment?

Show answer

Answer

Natural unemployment is a hypothetical rate of unemployment suggesting that there will never be zero unemployment in an economy that is operating well. 

Show question

Question

Frictional unemployment is a result of employers not wanting to hire employees

Show answer

Answer

FALSE

Show question

Question

George is excited to get a job after graduation. He's been applying to many entry-level marketing positions as he is almost at the end of the semester. Is George in the labor force?

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Answer

Yes, George is in the labor force as he is actively applying for jobs and is currently unemployed.

Show question

Question

Frictional unemployment is a sign that the economy is not doing well.

Show answer

Answer

FALSE

Show question

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