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Frictional Unemployment

Unemployment from differing expectations between job-seekers and employers

What is Frictional Unemployment?

Frictional unemployment is a type of unemployment that arises when workers are searching for new jobs or are transitioning from one job to another. It is part of natural unemployment and hence is present even when the economy is considered at full employment.

Unlike other kinds of unemployment, frictional unemployment does not increase during an economic recession. On the contrary, during a recession, it tends to decline because workers become more concerned about job security since fewer job opportunities are available in the market.

 

Frictional Unemployment Example

 

Causes of frictional unemployment

 

#1 A mismatch between the workers and available jobs

If there is a mismatch between job-seekers and available jobs in the market, that is considered frictional unemployment. The issue can especially affect the new entrants or re-entrants to the job market. This is generally due to the natural career progression for an employee, and their natural transition to a new job, industry or role.

 

#2 Workers dissatisfaction with work conditions 

Workers’ anxiety towards salaries, benefits, work location, job responsibilities, etc. may force them to quit their current job, and look for something that better meets their updated expectations.

 

Frictional Unemployment Diagram

 

Effects of frictional unemployment

Many economists view reasonable levels of frictional unemployment as a positive event for the economy. It provides businesses within the economy with a larger selection of human capital. Due to frictional unemployment, companies may gain access to more qualified employees.

This phenomenon can also have negative side effects if job-seekers take a long time to find a new job. In this case, there will be an increasing frustration among job-seekers that can lead to a decrease in productivity. Moreover, a longer frictional unemployment may result in a production decline in the economy because companies will not be able to satisfy their employee’s demands.

 

How to overcome frictional unemployment?

As stated above, if frictional unemployment exceeds certain reasonable levels, it may negatively affect the economy. Thus, regulators should monitor unemployment levels and take the necessary actions to address the issue. The following actions can be taken to keep this natural occuring unemployment at acceptable lower levels:

 

#1 Increase the information transmission between job-seekers and employers

The low transfer of information is the primary reason for rising frictional unemployment. The application of mediums (such as social networks, online job boards) that allow faster information exchange will reduce the matching time between the job-seekers and employers and subsequently lower the unemployment.

 

#2 Resist prejudice against workers, jobs, or locations

Regulators should resist existing prejudice by increasing the attractiveness of certain workers, jobs, or locations.

 

#3 Enhance the jobs’ flexibility

Regulators may encourage employers to provide more flexibility to prospective employees to make available jobs more compelling to job-seekers.

 

More resources

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