Frictional Unemployment

Frictional unemployment is the unemployment that results from the time it takes workers in finding jobs. The level of frictional unemployment depends on the rate of job separations and the average time of job finding.

Since labor is not a commodity i.e. their skills and interests vary, and different jobs require different skills, it is natural that it takes employees some time in finding a job that matches their qualifications, experience and career aspirations. The rate of frictional unemployment is the proportion of unemployed people who are unemployed because they are searching for jobs.

Frictional unemployment structural unemployment both determine the natural rate of unemployment, the long-run unemployment rate around which the actual unemployment rate moves.

Examples

Following are a few examples of people who are facing frictional unemployment:

  • A CPA who moves from Toronto to Winnipeg because her partner found a job there.
  • An unsatisfied social science graduate working at a non-profit organization who resigns to study information technology and switch careers.
  • A store manager who is laid off by his company because it intends to focus more on e-commerce and divest from physical stores.

Frictional unemployment exists because both people and firms are selective i.e. workers forego job offers in attempting to get a better job and firms have elaborate hiring procedures to attract the best talent.

Causes of Frictional Unemployment

Frictional unemployment depends on the labor turnover i.e. the number of job separations which in turn depends on a range of factors such as creative destruction, migration, employment insurance, further education, etc.

  • Creative destruction represents the process in which new discoveries give rise to new products and industries which require new skills and eliminating others. Declining industries lay off workers and new industries hire them but often there exists considerable mismatch between skills valued in the old industries and the new.
  • People may migrate from one city to another due to a number of reasons such as climate, family, etc. Since most of the jobs are location-specific, they resign and try to find new jobs in their new home.
  • Employment insurance represent the support payments paid by governments to the unemployment. It tends to increase frictional unemployment because it reduces economic hardship for the unemployment and allows them flexibility in trying to find a better job.
  • Fearing creative destruction and sectoral shift, some people may resign their jobs in an attempt to update and renew their skills for the impeding change in the structure of economy.

Written by Obaidullah Jan, ACA, CFA and last revised on