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What is frictional unemployment?

Definition: Frictional unemployment is a period of time during which a person is temporarily unemployed because he or she is looking for a new job or is in search of his or her first job after entering the labor force.

Understanding Frictional Unemployment

Frictional unemployment is a natural phenomenon associated with interruptions in work. This type of unemployment is usually short-term, and many workers experience frictional unemployment during their careers. The most typical cause of frictional unemployment is job transitions, usually leading to a higher quality job or higher pay. In addition, frictional unemployment can be caused by job searches for those who have not previously been employed. Because frictional unemployment is usually voluntary and desirable, it is considered a “healthy” form of unemployment, expected even in a stable and growing economy.

Is frictional unemployment good or bad?

Frictional unemployment is generally considered a natural part of the economic system. It is therefore considered good rather than bad.

In the absence of frictional unemployment, most people would work the same job all their lives. At most, people might take the first job they could find and never move. However, that first job might not be the best fit for your skills, ambition, or character. And the city is not where you want to spend your entire career.

An economy without frictional unemployment would stagnate. With a population that tends to find jobs quickly rather than staying out of work for too long, many people may not find themselves in the right positions at all. Unable to move to more suitable jobs later, many talents will be lost and the economy as a whole will perform below its potential.

In addition, entrepreneurial activity will be greatly reduced. Without the possibility of quitting one’s job to start a new business and having a labor pool from which to hire new workers, innovation and technological progress would be negligible.

For these reasons, small frictional unemployment is a good thing, and the target unemployment rate will never be zero.

What types of unemployment are there?

There are four main types of unemployment:

Frictional unemployment is when a person leaves one job to find a better job, or when a person who is not in the labor force starts looking for work. Let’s say you quit your current job and can’t start a new one for two weeks. In this situation, you were technically unemployed for two weeks of the year.

Structural unemployment is when the economy changes and some workers have skills that are no longer needed. For example, once the automobile became the primary means of transportation, the need to make wheelchair whips disappeared. As a result of structural changes in the economic system, the people who made these whips lost their jobs.

Seasonal unemployment occurs when people doing seasonal work do not work during the off-season. Typically, this type of unemployment includes winter fruit pickers, off-season tourism industry employees, construction workers, and other people whose work is highly dependent on the seasons.

Cyclical unemployment is caused by the economic cycle. During an economic downturn, many businesses fail and many people lose their jobs. Workers who lose their jobs as a result of a recession are considered cyclically unemployed. They should get a job again when the expansionary stage of the business cycle begins.

How is frictional unemployment calculated?

The most accurate estimate of frictional unemployment comes from data provided by the Bureau of Labor Statistics (BLS). They are generated by a household survey and then run through a statistical model to approximate the current employment situation.

In Table A of the monthly employment report, the BLS lists four categories of unemployment.

Individuals who have lost their jobs are generally not frictionally unemployed. They are more likely to have lost their jobs because of economic conditions (cyclical unemployment) or because the business has become obsolete (structural unemployment).

People who have left their jobs are almost exclusively frictional unemployed. They represent people who left their jobs voluntarily, but are still in the labor force (looking for work).

Those who have returned to work are a combination of different types of unemployment. 

Newcomers are people who are looking for their first job. They may have recently reached the age to start looking for work, or they may have just finished their training.

To estimate frictional unemployment, it is necessary to combine these last three categories: those who have left a job, those who are re-seeking a job, and those who are re-entering the workforce. By dividing the total number in these categories by the total labor force, we can get an approximate level of frictional unemployment.

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