What is Frictional Unemployment & How does it Affect the Economy?
What is “Frictional Unemployment?”
When you studied physics in high school or college, you may remember getting homework assignments asking you to calculate the force of two objects on each other, but to “ignore friction.” Typically, that’s because the small amount of force attributed to friction isn’t worth calculating and it’s just a distraction from the primary issue of the force between the two objects.
In unemployment, there’s something similar, called “frictional unemployment.”
Causes of Frictional Unemployment
Frictional unemployment happens because movement from one job to another isn’t perfect. Unless people always wait to quit their existing job to get a new one, there’s going to be a few weeks or months where people are technically “unemployed”, but they have a reasonable expectation of being hired in the near future.
Here are some examples of frictional unemployment:
People graduate from high school or college and are technically “unemployed” until they get their first job
People quit their job to find a better one, and are unemployed until then
People don’t take the first job they’re offered, because they think they can get a better one later
People quit their job to follow a spouse to another city, or just to move to that city themselves, perhaps because it offers a lower cost of living, better quality of life, or better employment opportunities, and are unemployed until they find a job in the new location
People take a break from working to care for other family members, such as parents or children, and then decide to go back to the workforce and are technically “unemployed”
Companies take longer to hire workers because they feel they might get a higher quality of worker if they wait, or because they don’t believe they can find the kind of worker they want
Frictional unemployment is why some economists call 2-3% unemployment, or even as much as 5% unemployment, “full employment,” and why state governments don’t fret about a small, but non-zero, amount of unemployment. No matter what the current economic situation is, there are always going to be some number of people out of work while they’re looking for their next job. It is simply not possible in a typical capitalist economy for everyone to be working all the time. That fraction of unemployment is the frictional unemployment, and like the friction in physics problems, economists feel it can safely be ignored.
Frictional Unemployment vs. Other Types of Unemployment
Frictional unemployment is opposed to other types of unemployment, such as structural.
“Structural unemployment is a type of long-term unemployment caused by shifts in the economy,” writes Investopedia. “It occurs when there is an oversupply of jobs and people who are willing to work them, but those people are not qualified to do so.”
For example, technological advances can cause some types of skilled laborers to become obsolete, or that laid-off skilled workers in a declining industry may not be able to find jobs in other industries. “Because structural unemployment is a direct result of the economic cycle, economists and analysts take it very seriously,” Investopedia writes. “If not addressed, this type of unemployment can last for years, even decades, increasing a nation’s unemployment rate.”
Structural employment plus frictional employment is sometimes together referred to as “natural unemployment,” because there’s no way to eliminate them completely.
Cyclical unemployment is specifically associated with job loss due to a recession, according to the Federal Reserve Bank of St. Louis. The problem with cyclical unemployment is that it can be a vicious circle, writes The Balance. “Cyclical unemployment creates more unemployment. The laid-off workers have less money to buy the goods and services they need. That further lowers demand.” A related term is “classical unemployment,” when workers need to be laid off because salaries are too high, the publication notes.
Seasonal unemployment is, as the name implies, associated with work that is seasonal in nature. “Workers affected by seasonal unemployment include resort workers, ski instructors, and ice cream vendors,” writes The Balance. “It could also include people who harvest crops. Construction workers are laid off in the winter in most parts of the country. School employees can also be considered seasonal workers.”
Finally, institutional unemployment is caused by long-term or permanent institutional factors and incentives in the economy, Investopedia writes, such as minimum wages, social benefit program, occupational licensing laws, discriminatory hiring, and high rates of unionization.
The Effect of Frictional Unemployment on Employees and the Economy
Frictional unemployment is considered to be less bad than other kinds of unemployment, because it’s a natural side effect of the way people look for jobs in this country.
“Frictional unemployment always exists in an economy with a free-moving labor force and is actually beneficial because it’s an indicator that individuals are seeking better positions by choice,” writes Investopedia. “It also helps businesses because it gives them a wider selection of potentially highly qualified candidates applying for positions.”
Indeed, without frictional unemployment, it would be harder for companies to hire new workers, because everyone is working already. When looking for sites for new offices, for example, some companies get concerned if the unemployment figure for the potential new location is too low, because they’re not sure they’ll be able to hire the new employees they need.
Frictional unemployment tends to go up when the economy is doing well, because people feel more secure about quitting a nonoptimal job if they feel reasonably sure they can get a better one without much trouble. It tends to go down when the economy is doing badly, because people are worried that if they lose this job, they might not be able to get another one, so they stay.
That said, nobody really measures frictional unemployment. One way to get an idea of how it’s doing is to look at the Bureau of Labor Statistics figures on “duration of unemployment.” If the duration of unemployment is lower, people have been able to get new jobs pretty quickly. If the duration of unemployment is higher, it’s taken longer for people to find new jobs.
Comparing the figures for the different time periods between March 2022 and March 2021, it’s easy to see that there are far fewer people unemployed for a long time in March 2022 compared with March 2021. So, in that case, frictional unemployment would be lower, because people are unemployed for less time between jobs.
To figure the frictional unemployment rate out yourself, you can also look at the BLS monthly Employment Report, specifically the columns on “job leavers,” “reentrants,” and “new entrants,” add them up, and divide by the total labor force, according to The Balance.
Another more anecdotal way of measuring frictional unemployment is the current figures on The Great Resignation as more people are quitting their jobs, perhaps because the pay is too low, they don’t find the work fulfilling, or they don’t feel that they’re being treated well. In that case, frictional unemployment might be going up.
“The phenomenon of people quitting their job without having another one to move into is an indication that they ‘believe’ the economy is robust enough to not fear unemployment. In recent years it’s become a closely tracked indicator of consumer confidence, called the ‘Quit Rate,’” writes Investopedia. “To illustrate this point, in 2019 the Quit Rate hit its highest level since the Bureau of Labor Statistics started tracking it in 2000. Gallup reported that 2.3% of employees quit their jobs that year. Beginning at the end of 1Q of 2020, the economic crisis hit, and the national quit rate dropped to 1.4%. But by May 2021, it was an even higher 2.5%.”
How to Reduce Frictional Unemployment
While frictional unemployment isn’t inherently bad, it is inefficient. Just like the physics problem – where friction reduces speed and creates heat – frictional unemployment means that there are weeks and months where people aren’t working and so they aren’t as productive and aren’t contributing as much to the economy, and companies aren’t able to take advantage of their skills and knowledge.
Consequently, there are still reasons to try to reduce frictional unemployment. For example, companies can make it easier for potential employees to find their open jobs, such as by posting them online; make the application process less arduous; and hire people more quickly because they’re afraid if they don’t, the potential employee may take a job somewhere else. Employers can also offer relocation assistance, or let employees work remotely, to provide a larger pool of potential workers, writes Indeed.com.
Some people believe that unemployment insurance (UI) benefits – such as the increased payments during the COVID-19-caused recession – increases frictional unemployment because people are staying out of the workforce longer. For that reason, some states cut expanded unemployment benefits last year. But a recent study by the Federal Reserve Bank of San Francisco found that might not have been the case, and that cutting benefits didn’t help reduce the number of open jobs. In fact, such cuts might have hurt the economies of those states by reducing the amount of money people had to spend.
“UI withdrawals had limited direct impacts on hiring rates, which suggests the enhanced UI benefits were not an important source of labor shortages in 2021,” notes the study. “On the other hand, the termination of UI benefits did not undermine labor market conditions in the states that cut benefits. Nonetheless, studies of past UI benefit expansions suggest that many individuals who lose benefits are more likely to be forced to reduce consumption and suffer substantial hardship. Such tradeoffs are important considerations for designing and assessing UI policy changes.”