Frictional Unemployment

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.

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.

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, longer frictional unemployment may result in a production decline in the economy.

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 naturally occurring unemployment at acceptable lower levels:

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

The low transfer of information is a 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 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 job flexibility

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

More Resources

CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® designation for financial analysts. To continue learning and advancing your career, these additional CFI resources will be helpful:

• Employee Morale
• Labor Force KPIs
• Sense of Purpose at Work
• Virtual Team
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