Frictional Unemployment with Examples, Causes, and Rates

When Unemployment Is a Good Thing

graduating students example of frictional unemployment
••• Photo: Andy Sacks/Getty Images

Frictional unemployment is when workers are jobless and looking for work in a healthy economy. It doesn't matter if they leave voluntarily or are fired. Others may be returning to the labor force. It's differentiated from other types of unemployment because it's part of normal labor turnover.

Frictional unemployment is unavoidable. The good news is that it's usually short-term. It's one of the components of natural unemployment. It is the lowest rate of unemployment in a growing economy . Unemployment below that level means employers can't find enough workers to keep producing all they can. It slows economic growth. The other component is structural unemployment. It occurs when workers' skills don't match up with employers' needs. 

Causes

Why does frictional employment exist? It would be more logical for workers to hold on to their existing jobs until they find new ones. But often workers must move for unrelated reasons before they can look for new jobs. Some marry and must move to be near their spouse's job. Many take time off to care for relatives. Some have saved enough money so they can quit unfulfilling jobs. They have the luxury to search until they find just the right opportunities.

During a recession, frictional unemployment drops. Why? Workers are afraid to quit their jobs even if they don't like them. They know it will be difficult to find better ones. 

Effects

Frictional unemployment isn't harmful to an economy. It's not like cyclical unemployment that results from a recession. That's when businesses lay off employees whether they like their jobs or not. An increase in frictional unemployment means more workers are moving toward better positions. 

In fact, frictional unemployment benefits the economy. It allows companies more opportunities to find qualified workers. If everyone stayed in their jobs until they found new ones, it would be harder for companies to bring on good workers. Labor costs would rise, creating cost-push inflation. Workers' pay would increase, reducing U.S. income inequality.

Examples

Others are workers who move to a new town without lining up another job. Some people quit abruptly, knowing they'll get a better job shortly. Still, others might decide to leave the workforce for personal reasons such as retirement, pregnancy or sickness. They drop out of the labor force. When they return and start looking again, they're counted part of frictional unemployment

Graduating students are a good illustration of frictional unemployment. They join the labor force and are unemployed until they find work. Mothers who rejoin the workforce after they've raised their children are another example. A construction worker moving to Arizona in the winter is yet another. They all join the count in the frictional unemployment figures once they start searching for work. In all of these examples, they are improving their financial situations. 

Frictional Unemployment Rate Calculation

The Bureau of Labor Statistics measures frictional unemployment. It counts those who have actively looked for jobs in the last four weeks. Use the BLS monthly Employment Report. Go to the "Employment Situation Summary Table A. Household data, seasonally adjusted." Find "Reasons for Unemployment." The following three numbers give a good estimate of the frictional unemployed.

  1. Job leavers. These refer to those that voluntarily quit their jobs).
  2. Reentrants.
  3. New entrants.

 To get the frictional unemployment rate, add these together, and divide by the total labor force

Solution

Frictional unemployment can be reduced by bringing better information about jobs to the worker. Job matching services on the internet, such as Simply Hired, Monster, and CareerBuilder accomplished this.

But it still takes time to write a compelling resume, search for the right job, and apply. Job seekers must also wait for a response and go through the interview process. Many job seekers find the best source of new jobs is through their professional network. Online services such as Facebook, Twitter, and LinkedIn have helped in professional networking.

Expansionary monetary policy cannot reduce frictional unemployment. In fact, that might even increase it. In a booming economy, jobs are in higher supply. Often, employers have a hard time finding qualified candidates. In the expansion phase of the business cycle, workers feel more confident to quit their job in search of a better one. That increases frictional unemployment.