What Is Frictional Unemployment?
Frictional Unemployment Explained
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.
The chart below depicts the natural rate of unemployment, which includes frictional, structural, and surplus unemployment. It shows the rate from 1950 through its projections into 2030.
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.
Why Does Frictional Unemployment 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 may be afraid to quit their jobs even if they don't like them. They know it will be difficult to find better ones.
How Does It Affect the Economy?
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.
How Does Frictional Unemployment Work?
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 as 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. Parents who rejoin the workforce after taking time to stay home and raise their children are another example. 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.
How to Calculate the Frictional Unemployment Rate
The Bureau of Labor Statistics (BLS) measures frictional unemployment. It counts those who have actively looked for jobs in the last four weeks. You can 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:
- Job leavers—those who voluntarily quit their jobs
- New entrants
To get the frictional unemployment rate, add these together and divide by the total labor force.
Solutions for Frictional Unemployment
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 can help accomplish 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 quitting their jobs in search of better ones. That increases frictional unemployment.
Corporate Finance Institute. "Frictional Unemployment." Accessed June 15, 2020.
Corporate Finance Institute. "Structural Unemployment." Accessed June 15, 2020.
Bureau of Labor Statistics. "The Employment Situation -- November 2019." Accessed June 15, 2020.
Federal Reserve Bank of St. Louis. "Unemployment and the Role of Monetary Policy." Accessed June 15, 2020.