Is frictional unemployment indicative of a struggling economy? The reverse is true. The majority of jobless individuals belong to the frictionally unemployed categories. This is a favorable indicator since labor supply matches the demand. If the rate becomes very high, this might be detrimental to the economy. On the other hand, it can also be seen as advantageous in the short run. Continue reading to understand the definition of frictional unemployment and its causes and effects.
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What Exactly Is Frictional Unemployment?
Frictional unemployment refers to those who are categorized as jobless when between jobs. When individuals leave one job for another, they may experience a brief period of unemployment. Since there will always be employees seeking new employment, frictional unemployment will always exist. The two categories of naturally occurring unemployment are frictional unemployment and structural unemployment. The natural unemployment rate measures this natural kind of unemployment.
The Bureau of Labor Statistics (BLS) of the United States utilizes information from a monthly survey of around 60,000 homes to determine the unemployment rate. To be termed jobless, a person must be unemployed and actively looking for work. They are not considered part of the labor force and are not included in the unemployment rate if they are not actively seeking work.
To be classified as frictionally unemployed, a person must be between jobs and not have lost employment due to structural or cyclical factors. For example, a worker who leaves in expectation of securing a new position or a recent graduate who has just joined the workforce would be termed frictionally jobless.
Working Principles of Frictional Unemployment
Frictional unemployment occurs when an employee either willingly leaves or is fired from their position. People just entering the labor field and looking for their first job would also be considered frictionally unemployed. Since it represents the time it takes for employees to locate occupations that fit them best, frictional unemployment is seen as less harmful than other forms of unemployment. In a thriving economy, people take advantage of opportunities to work where they can contribute most effectively.
In addition, frictional unemployment is the only form of unemployment tracked by the BLS that is short-term. Job loss due to a skills gap, or structural unemployment, often lasts longer since the affected individual will need to acquire new skills before obtaining gainful work. Nevertheless, another kind of unemployment, cyclical unemployment, may cause more joblessness. Recessions are blamed for cyclical employment, which is not recognized as a natural occurrence.
Causes of Frictional Unemployment
1. Employee unhappiness with working circumstances
Workers’ concerns about salary, perks, work location, job duties, and other factors may lead them to leave their present position and seek employment that better fulfills their revised expectations.
2. A mismatch between available employees and positions
When there is a mismatch between job-seekers and available jobs, this is referred to as frictional unemployment. The problem might disproportionately impact new and re-entrants to the employment market. This is often the result of an employee’s normal career growth and shifts to a new job, sector, or responsibility.
Effects of Frictional Unemployment
Numerous economists consider frictional unemployment as a beneficial development for the economy. It offers enterprises in the economy access to a broader pool of human resources. Because of frictional unemployment, businesses may have access to more qualified candidates. These phenomena might also have severe consequences if job-seekers wait too long to locate a new position. In this situation, job-seekers will get more frustrated, which might lead to a decline in productivity. Moreover, prolonged frictional unemployment may result in a reduction in economic output.
3 Procedures to Overcome Frictional Unemployment
As mentioned before, the economy may suffer if frictional unemployment reaches certain appropriate levels. Therefore, authorities should monitor unemployment rates and take appropriate measures to remedy the problem. The following procedures can be done to maintain appropriate levels of this naturally occurring unemployment.
1. Increase job adaptability
Regulators may require employers to provide potential workers more flexibility to make available employment more appealing to job searchers.
2. Resist bias toward employees, jobs, and places
Regulators should prevent discrimination by raising the attraction of certain employees, jobs, and places.
3. Enhance the flow of information between job-seekers and employers
Low information transmission is a significant cause of increased frictional unemployment. Using quicker information-sharing platforms would minimize the time needed to match job seekers and employers, reducing unemployment.
Lowest Unemployment that the U.S. Economy Can Sustain
The natural unemployment rate quantifies unemployment outside of recessions in the economic cycle. All three types of unemployment include frictional, structural, and surplus unemployment. Given both frictional and structural unemployment are unavoidable in a free market system, the U.S. economy’s lowest level of unemployment depends on how much both rates decline. When it comes to unemployment, the Federal Reserve says that “the lowest level of unemployment that the economy can tolerate fluctuates over time as the labor market does.” There will always be some unemployment in a growing, healthy economy since people are always changing occupations and entering the labor force.
Non-cyclical unemployment, or the natural unemployment rate in the United States, may change over time in the graph below from the Federal Reserve Bank of St. Louis. Between 1952 and 2022, the rate of non-cyclical unemployment peaked in 1978 at 6.2%. In 2022, it fell to a low of 4.4%. Nevertheless, there will always be frictional and structural unemployment, even when the unemployment rate is low.
In short, frictional unemployment occurs when an individual is between jobs. This form of unemployment is normal since employees are always hunting for new jobs. Consequently, even in a robust economy, frictional unemployment will always persist.
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Read more: Economies
Source: The Balance