Frictional unemployment – definition and meaning
Frictional unemployment refers to people who are simply moving from one job to another, but are taking their time. It is part of the jobless total caused by individuals who are spending time searching for another job, or perhaps are taking a break before beginning with a new employer. Even in a country where there is technically full employment, there will always be some frictional employment, simply because employees change jobs occasionally.
It is sometimes called search unemployment. Those in frictional unemployment form part of the voluntary unemployment total.
Friction refers to the time, energy and money used up looking for a new job. During the job-searching process it is impossible to avoid friction – it is a natural part of job-hunting. You might not accept the first job offer because you don’t like the pay, or the hours are too long, etc. However, in the vast majority of cases, this friction is short-term.
Unemployment has four classifications: Structural, Seasonal, Cyclical and Frictional.
Apart from people in between jobs, it also includes graduate students entering the job market for the first time, school leavers, re-entrants such as former homemakers who want to invest some time and effort in finding the job that is right for them.
Put simply, frictional unemployment is generally classified into three categories: 1. Job leavers. 2. Individuals coming back to work. 3. New entrants.
Frictional unemployment and the economy
Some frictional unemployment is good for the economy, because if millions of people spend time looking for the right job, the end result is a better allocation of resources.
However, if workers change jobs too often or spend too long looking for that right match, the economy suffers because some work will be lost or never done.
Governments will always try to keep unnecessary frictional unemployment as low as possible.
Frictional unemployment comprises job leavers, reentrants and new entrants. By adding them up, you can calculate what proportion of total unemployment they represent. (Data Source: Bureau of Labor Statistics)
One of the main benefits of frictional unemployment for the economy is that it allows employers the opportunity to find qualified personnel. If unemployment did not exist, if all workers stayed in their jobs until a new one was found, it would be considerably more difficult, expensive and time-consuming for employers to take on good workers. Labor costs would increase, which would push up the price of goods and services, i.e. inflation would grow.
The size of this part of unemployment is mainly driven by the number of job vacancies in relation to people seeking jobs. When the two are evenly matched, or the supply of vacancies is lower than the number of individuals seeking work, people will spend less time looking around, compared to an economy where supply (job vacancies) far outstrips demand.
Frictional unemployment numbers usually decline when prospective job seekers are quickly matched with ‘interesting jobs’. This is accomplished through the transmission of data.
People currently spend less time compared to pre-Internet days searching for the right job. Job posting websites such as Simply Hired, Monster, and CareerBuilder, and online social media have both helped reduce frictional unemployment levels.
Monetary expansion typically pushes down all forms of unemployment, except for frictional unemployment. In actual fact, when there is monetary expansion there will be more job offers, which tend to lengthen how long people continue searching around for that right employment match.
Frictional unemployment declines during a recession because workers stick to their jobs, even unsatisfying ones. People are less likely to leave their jobs and spend a while researching employment opportunities before committing, because there is a risk during a recession that they might remain unemployed.
Calculating frictional unemployment
To calculate the frictional unemployment rate, you divide the number of workers actively looking for work by the total labor force.
If you go to the Unemployed persons by reason for unemployment (Table A-11) section of the website of the US Bureau of Labor Statistics, you can work out what the frictional unemployment rate is. Add these three figures: 1. Job Leavers. 2. Reentrants and, 3. New entrants. Divide that by the total number of unemployed and you will have an approximate rate.