Frictional Unemployment - Macroeconomics | Macro Economics - B Com PDF Download

Definition: Frictional unemployment is when workers leave their jobs to find better ones. It's usually a voluntary exit but can also result from a layoff or termination with cause. Friction is the time, effort, and expense it takes the worker to find a new job.

Friction is unavoidable. Workers must find new opportunities, go on interviews and even move before they can get new jobs. It's an inevitable part of the job search process.

The good news is that it's usually short-term.

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. They might get married or must care for elderly relatives. Other times, they might 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. But unemployment rates still rise. That's because cyclical unemployment more than offsets the decline in frictional unemployment. Businesses lay off employees whether they like their jobs or not.

Effects

Frictional unemployment isn't harmful to an economy.

Other types of unemployment, such as cyclical and structural unemployment, are worse. 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

A good illustration of frictional unemployment is when students graduate. They join the labor force and are unemployed until they find work. A second example is mothers who rejoin the workforce after they've raised their children. A third example is a construction worker moving to Arizona in the winter. They are all counted 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 (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. That was accomplished by job matching services on the internet, such as Simply Hired, Monster and CareerBuilder.

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. Even this has been helped by online services such as Facebook, Twitter and LinkedIn.

Frictional unemployment cannot be reduced through expansionary monetary policy.

In fact, that might even increase it. That's because, in a booming economy, jobs are in a 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.