Frictional unemployment

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual.

Definitions

Beveridge curve of vacancy rate and unemployment rate data from the United States Bureau of Labor Statistics

Frictional unemployment exists because both jobs and workers are heterogeneous, and a mismatch can result between the characteristics of supply and demand. Such a mismatch can be related to skills, payment, worktime, location, attitude, taste, and a multitude of other factors. New entrants (such as graduating students) and re-entrants (such as former homemakers) can also suffer a spell of frictional unemployment. Workers as well as employers accept a certain level of imperfection, risk or compromise, but usually not right away; they will invest some time and effort to find a match. This is in fact beneficial to the economy since it results in a better allocation of resources. However, if the search takes too long and mismatches are too frequent, the economy suffers, since some work will not get done. Therefore, governments will seek ways to reduce unnecessary frictional unemployment.

Frictional unemployment is related to and compatible with the concept of full employment because both suggest reasons why full employment is never reached. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.^[1] Frictional unemployment coincides with an equal number of vacancies. Numerically, it is therefore maximal when the labor market is in equilibrium. When for instance demand far exceeds supply, the frictionally unemployed will be few as they will get many job offers.

The frictions in the labor market are sometimes illustrated graphically with a Beveridge curve, a downward-sloping, convex curve that shows a fixed relationship between the unemployment rate on one axis and the vacancy rate on the other. Changes in the supply of or demand for labor cause movements along this curve. An increase in labor market frictions will shift the curve outwards, and vice versa. A longer term form of frictional unemployment is structural unemployment which is very similar.

Examples

One kind of frictional unemployment is called wait unemployment: it refers to the effects of the existence of some sectors where employed workers are paid more than the market-clearing equilibrium wage. Not only does this restrict the amount of employment in the high-wage sector, but it attracts workers from other sectors who wait to try to get jobs there. The main problem with this theory is that such workers will likely "wait" while having jobs, so that they are not counted as unemployed. In Hollywood, for example, those who are waiting for acting jobs also wait on tables in restaurants for pay (while acting in "Equity Waiver" plays at night for no pay). However, these workers might be seen as underemployed (definition 1).

Theories

Solutions

Policies to reduce frictional unemployment include:

• educational advice;
• information on available jobs and workers;
• combating prejudice (against certain workers, jobs or locations);
• incentives and regulations (e.g. when the frictionally unemployed receive benefits);
• relocation of industries and services;
• facilities to increase availability and flexibility (e.g. daycare centers);
• aid or grants to overcome a specific obstacle (e.g. if a handicapped worker is employed);
• reduction of the gap between gross and net wages (e.g. by taxing consumption instead).
• When handing out work permits (to foreigners), i.e. must stay with that company at the same work place address as state on the work permit.

References

External links

• Market with search frictions, Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2010 compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences.