What is Frictional Unemployment
Frictional unemployment occurs when employees are transitioning between jobs. It is a normal part of a dynamic economy and is a component of natural unemployment. It is unaffected by government policies since it is driven predominantly driven individuals voluntarily leaving their jobs in search of a better one.
Unlike structural and cyclical unemployment, this type of unemployment is different in that can occur regardless of the state of the economy. Both structural and cyclical unemployment result from involuntary factors, namely employees being laid off or who are unable to find work because of reduced demand.
Key Takeaways
- Frictional unemployment occurs as a result of employees transitioning between jobs
- This is a normal part of a dynamic economy and can be an indicator of a growing economy
- In a recession, frictional unemployment may decrease as job seekers take on jobs for security purposes
- Manage frictional unemployment by reshaping where and how work is completed to increase candidate pool and retain top performers
What Causes Frictional Unemployment
Any reason for an employee to voluntarily leave their job contributes to frictional unemployment. The largest contributor is employees leaving for a better job. Other causes include:
- Recent graduates entering the workforce
- Family events that create leave, such as parental leave, bereavement leave, or sick family members
- Individuals returning from leave
- Relocation to a new city
In some cases, unemployment benefits can encourage this type of unemployment as it provides a means for individuals to continue looking for the job they want.
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The New Graduate Example
Robert recently graduated from college and is now looking for a job. He applies for numerous jobs and receives a few interviews. He lands an offer but decides it is too low. Robert continues to look until he finds the job of his dreams. Finally, he secures an interview with a company he admires, a team he likes, and an offer that is attractive. Robert accepts the job and starts work. The time between Robert graduating to the time that begins working is considered frictional unemployment.
How Frictional Unemployment is Calculated
Frictional Unemployment = Workers Actively Looking for a job / Total Labour Force
Workers actively looking for a job = new entrants to the job market + returning entrants + individuals who have left their job
In the US, the Bureau of Labor Statistics calculates frictional unemployment using the equation above. They look at workers actively looking for a job in the prior 4 weeks.
Effects of Frictional Unemployment
Frictional unemployment creates benefits and drawbacks for the economy. Increasing frictional unemployment means that employees are voluntarily leaving their jobs in search of new ones. Most people voluntarily leave in search of higher pay, better title, and new challenges. This is good for the individual and the economy as it means that the individual will likely have a higher standard of living with more disposable income to spend in the economy.
For employers, this type of unemployment is positive as it widens the candidate pool for hiring. Finding quality talent is one of the hardest tasks. Having a wider pool can increase the chances of finding the right individual for a role, which will improve productivity at the company and ultimately help the company grow.
If frictional unemployment is too high, it signals that job seekers are not finding jobs that are suitable for their skillset. This can lead to stagnated growth at companies and companies may not be hiring appropriate talent, which destroys productivity and can also lead to employees exiting an economy but moving to another country to find work.
In a recession, this type of unemployment typically decreases. Job seekers who were previously holding out for the best job may now accept a less than desirable job offer in trade for job security.
Ways to Manage Frictional Unemployment
There are different ways that this can be addressed. These include:
- Improved job matching – providing job seekers with relevant information to help match them to their desired jobs will reduce the time they spend in frictional unemployment. Online job boards and recruiting services play a key role in this job matchmaking.
- Remote work and work from home – adopting a work from home policy or creating roles that are fully remote will allow a company to break the geographic barrier of work. This is beneficial as it can help retain talent that would have otherwise left due to relocation while widening the candidate pool.
- Re-imagining the role – companies are recognizing the need to evolve work away from a standard 9 to 5 in the office. As top-performers leave for life events, such as parental leave, reshaping their job to part-time or providing flexibility as project work retain key employees while reducing this type of unemployment.
