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.

What is frictional unemployment?

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 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.

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 examples

Frictional unemployment examples include:

• 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

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 as a frictional unemployment example.

Fig. 1 - Frictional unemployment example: US March 2021, StudySmarter. Source: US Bureau of labor statistics¹

Fig. 2 - Frictional unemployment example: US March 2022, StudySmarter. Source: US Bureau of labor statistics²

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!

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. 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.

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

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:

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.

Discouraged Worker

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.

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.

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.