What is Frictional Unemployment?
Frictional unemployment is the time spent temporarily unemployed while a person looks for a new job or tries to find their first job after entering the labor force.
Frictional unemployment is a natural phenomenon that occurs when people are between jobs. This type of unemployment is usually short-term, and most workers experience some frictional unemployment during their career. The most common cause of frictional unemployment is the transition from one job to another — usually resulting in an improved fit or higher pay for a worker. Frictional unemployment also occurs when a person that was previously outside the labor force begins looking for work. Because frictional unemployment is typically voluntary and desirable, it is considered a “healthy” form of unemployment, to be expected even in a stable and growing economy.
Imagine Joe just graduated from college with a four-year degree. He is now seeking a full-time job to put that education to good use. Each day, he spends time researching job opportunities and going to interviews. If the Bureau of Labor Statistics asked Joe about his job status, he would be considered unemployed. Even if he received a job offer today for a position starting next month, he would be counted as unemployed until his first day of work. That transition between college and career is frictional unemployment.
Frictional unemployment is like a swimmer taking a breath…
Swimmers may go a long way underwater, but they have to come up for air at some point. When they do, they are still swimming, but they aren’t underwater. It would be strange to argue that the time spent taking a breath is a bad thing. We all understand it’s just part of the process. Likewise, we don’t generally expect a person to keep the same job they get at 16 until they retire — It’s normal to look for new opportunities as your skills grow.
Frictional unemployment is generally considered a natural part of the economic system. As such, it is more likely to be considered good than bad.
If there were no frictional unemployment, people would just stay put for their whole lives in the same job. In the extreme, that would mean taking the first job you could find and never moving. But that first job might not be the best fit for your skills, ambitions, or personality. And that city might not be where you want to spend your whole career.
It might make sense to spend a little time unemployed to find a better fit. Or, you might have gained some skills during your time at one company that the company doesn’t value enough. After being passed up for promotion, it might make sense to go back on the job market.
Without some frictional unemployment, the economy would become stagnant. Because people would typically take jobs quickly, rather than spending too long unemployed, a lot of people could end up in positions that weren’t their best fit. Without the freedom to later switch to a better job, a lot of talent would be wasted, and the economy would generally be performing below its potential.
It also means that entrepreneurship would be significantly reduced. With people unable to quit their jobs to open new businesses, and without a labor pool from which new employees could be hired, there would be little innovation and hardly any technological progress.
For these reasons, a little bit of frictional unemployment is a good thing and the unemployment rate target will never be zero. Of course, some frictional unemployment is not purely good — If people spend too much time outside the labor market, the economy is producing less than it could.
There are four basic types of unemployment:
Frictional unemployment happens when a person leaves one position to find a better job, or when someone outside of the labor force begins looking for work. Say you quit your current job and take two weeks before starting a new one. In that situation, you were technically unemployed for two weeks of the year.
Structural unemployment occurs when the economy changes and leaves some workers with skills that are no longer needed. For example, when the automobile became the primary mode of transportation, buggy whip manufacturers were no longer needed. The people that were making those whips lost their jobs due to a structural change in the economic system.
Seasonal unemployment is what happens when people who do seasonal work are not working during the off-season. This type of unemployment typically includes fruit pickers in the winter, tourism industry workers in the offseason, construction workers, and others whose work is highly dependent on the time of year.
Cyclical unemployment arises from the business cycle. When an economy enters the recessionary phase, many businesses fail, and a lot of people end up losing their jobs. Those workers who become displaced due to the recession are considered to be cyclically unemployed. They should get work again when the expansionary stage of the business cycle begins.
Not all people without a job are unemployed. Stay-at-home parents, college students, children, retirees, homemakers, hospitalized individuals, and prisoners are all examples of people without work who are not considered unemployed.
To be considered unemployed, a person must be actively looking for work and not receiving compensation. This definition is essential in understanding the causes of frictional unemployment.
Frictional unemployment almost always begins as a voluntary move. It could be a person unhappy with their job who decides to quit. Perhaps they move to a new town, or maybe they just want a change of pace in their current hometown. Either way, while they wait to start their new job, or while they search for better opportunities, they are considered to be frictionally unemployed.
Another cause might be a new entrant into the labor force. A person 16 years old or older might start looking for their first job. As long as they are looking for work, these job seekers are frictionally unemployed. Their high school friends not interested in working are not considered unemployed (because they are not part of the labor force). Likewise, a recent graduate from college would be frictionally unemployed while they attempt to find a place to put their education to good use.
Finally, re-entry can cause frictional unemployment. Perhaps a parent took a few years off to raise a child. Once that child is old enough, they may want to go back to work. From the time they make that decision to the time they draw a paycheck, they are considered to be frictionally unemployed. Likewise, someone recently released from prison or someone that recovered from a major illness might start looking for work again. Those reentrants cause some frictional unemployment while they get back into the workforce.
Meanwhile, maybe a person decides they want to take their career in a whole new direction. If they elect to take a year off to learn a new skill, and they are not looking for work while they learn it, they are not unemployed during their training. But, once they finish that program and begin seeking a job in the new field, they are considered to be reentrants contributing to frictional unemployment. However, if the same situation were created because their old job became obsolete, this situation would become structural rather than frictional unemployment.
The best estimate of frictional unemployment comes from the data provided by the Bureau of Labor Statistics (BLS). This data is generated using a survey of households, which is then fed through a statistical model to approximate the current employment situation.
In Table A of its monthly employment report, the BLS lists four categories of unemployment.
Job losers are generally not frictionally unemployed. They are more likely to have lost their job due to economic conditions (cyclical unemployment) or because the business is becoming obsolete (structural unemployment).
Job leavers are almost exclusively frictionally unemployed. These are people who left their jobs voluntarily but are still in the labor force (looking for work).
Reentrants are a mix of unemployment types. Those reentrants that voluntarily left a job to complete training or college are frictionally unemployed — As are those who were not in the labor force due to non-economic factors (returning stay-at-home parents, prison release, hospital discharge, etc.). An exception is “discouraged workers” reentering the workforce. These are people who became so discouraged by not being able to find work in a really bad economy that they stopped looking altogether. When they start to look for work again they are still considered cyclically unemployed.
New entrants are people looking for a first job. They may have just gotten old enough to start looking for work, or they may have just finished their education.
To obtain an estimate of frictional unemployment, you can combine those last three categories: Job leavers, reentrants, and new entrants. Dividing the total number within these categories by the total labor force would approximate the frictional unemployment rate.
What is a Variable Cost?
A variable cost is an expense that changes with a company’s level of production — More output means higher costs, and less means lower costs.
What is a Nonprofit Organization (NPO)?
A nonprofit organization (NPO) is an entity, often tax-exempt, that seeks to serve the public good rather than make a profit.
What is an Exempt Employee?
An exempt employee is one who is not entitled to overtime pay, or covered under the minimum hourly wage, by nature of their job duties and manner of compensation.
What is Insider Trading?
Insider trading occurs when someone buys or sells stock in a company based on non-public information that materially affects their decision to trade.
What is an Encumbrance?
An encumbrance is a legal restriction on an asset, such as a piece of property in real estate, that may affect the transfer of the asset or restrict usage.