Frictional Unemployment

What Is Frictional Unemployment?

Frictional unemployment is the result of voluntary employment transitions within an economy. Frictional unemployment naturally occurs, even in a growing, stable economy. Workers choosing to leave their jobs in search of new ones and workers entering the workforce for the first time constitute frictional unemployment. It does not include workers who remain in their current job until finding a new one, as, obviously, they are never unemployed.

Frictional unemployment is always present in the economy. It contributes to the overall employment picture and is part of natural unemployment, which is the minimum unemployment rate in an economy due to economic forces and movement of labor. Natural unemployment also reflects the number of workers who are involuntarily unemployed, whether due to a lack of skill or replacement by technology.

Understanding Frictional Unemployment

The frictional unemployment rate is calculated by dividing the workers actively looking for jobs by the total labor force. The workers actively looking for jobs are typically classified into three categories: workers who left their job, people returning to the workforce, and new entrants.

Recent graduates from school and other first-time job seekers may lack the resources or efficiency for finding the company that has an available and suitable job for them. As a result, they don’t take other work, temporarily holding out for the better-paying job. Temporary transitions — such as moving to another town or city — will also add to frictional unemployment, as there is often a gap in time between when workers quit their job and when they find a new one.

Workers quitting their job to look for better pay add to frictional unemployment. In other cases, workers may resign from their job to go back to school or learn a new skill because they believe they need the skill to earn more income. Others might leave the workforce for personal reasons, such as to care for a family member, sickness, retirement, or pregnancy. When the workers return to the workforce to look for a job, they’re counted as part of frictional unemployment.

The phenomenon of people quitting their job without having another one to move into to 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."

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%.

Unemployment benefits paid by the government can sometimes lead to frictional unemployment because the income allows workers to be selective in finding their next job, further adding to their time unemployed. It can also occur due to companies abstaining from hiring because they believe there are not enough qualified individuals available for the job.

Frictional unemployment is actually beneficial because it is a sign that workers are voluntarily seeking better positions, providing businesses with a wider array of qualified potential employees.

Advantages of Frictional Unemployment

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. It also helps businesses because it gives them a wider selection of potentially highly qualified candidates applying for positions. It is short term and thus does not place much of a drain on government resources.

Frictional unemployment is reduced by quickly matching prospective job seekers with job openings. Thanks to the internet, workers can use social media and job-posting websites to search for jobs, which can lead to quicker turnaround times in getting hired.

Frictional Unemployment vs. Cyclical Unemployment

Frictional unemployment is not as worrisome as cyclical unemployment, which is predominant in a recession and caused by businesses laying off employees. In a recession with unemployment rising, frictional unemployment actually tends to decline because workers are usually afraid to leave their jobs to look for a better one.

Special Considerations

Frictional unemployment is the only form of unemployment that is largely unaffected by economic stimulus from the government. For example, during bad economic times, the Federal Reserve Bank might lower interest rates to encourage borrowing. The hope is that the added money will spur spending by consumers and businesses, leading to growth and a reduction in unemployment. However, added money doesn’t address the causes of frictional unemployment, except perhaps in giving some workers the courage to become unemployed while searching for a new job. Still, as noted above, a challenging economic landscape would probably forestall such a choice.