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Frictional unemployment occurs when unemployed workers have yet to find a suitable new job. It takes time for workers to move from one position to another, mainly for higher-paying jobs.
And, for graduates, as they enter the labor force, they take several processes before getting the right job. They should prepare a curriculum vitae, browse alternative job openings, wait for interviews, and so on. It all takes time.
The Central Statistics Agency classifies both as unemployed as long as they are not working and actively looking for jobs. Sometimes, this term also refers to searching for unemployment since they were actively looking for a job.
Frictional unemployment is inevitable
Frictional and structural unemployment form what economists call the natural rate of unemployment. Both types of unemployment always persist in the economy, even in full employment. As a result, the unemployment rate will never be zero.
Let’s discuss and distinguish the two.
Frictional unemployment occurs because there is a time lag before people find the right job, and employers hire them.
Structural unemployment exists because workers lack the skills that employers demand. Hence, there is a mismatch between workers’ skills and the qualifications required by the business. This phenomenon commonly occurs when the economic structure changes and eliminates specific skills and requires entirely new skills. For example, during agricultural mechanization, some jobs from farm laborers were replaced by machines. They also cannot move to the factory because they do not have the necessary expertise.
What happens if unemployment is forced to fall below its natural level?
When the unemployment rate reaches its natural level, inflationary pressures increase. A further reduction in the unemployment rate will only raise the inflation rate. Hence, this situation raises a trade-off for policymakers: choosing a lower unemployment rate or more moderate inflation.
When policymakers opt to moderate inflation, they will take contractionary steps to avoid an overheated economy. One of these policies is raising interest rates. Higher interest rates are usually at the expense of the unemployment rate as business activity shrinks, hence requiring less labor.
Causes of frictional unemployment
It takes time for someone to find the right job and start working. These time lags can occur for the following reasons:
- Information searching
- Recruitment and negotiation processes
- No urgency to get a new job
Taking time to find the right vacancy
Workers sometimes do not have full details on where the job vacancies are. Vacancies may be available but do not require their skills. They might need to google many companies that offer vacancies. In this case, the presence of online job fairs such as JobStreet accelerates the process of finding the right position.
After finding, you need to follow the selection and negotiation process
You, for example, have found the right job. You may need to go through a series of processes, from medical tests to interview tests and compensation negotiations.
Say, you have gone through all the processes and entered the salary negotiation stage. You may ask for a salary that is higher than the employer’s expectations. Of course, the employer will not recruit you.
Therefore, you will be unemployed until you find the right employer. This expectation applies to salary, as well as the selection and negotiation of annual bonus compensation, work time, and work location.
No sense of urgency
You might be looking for a higher-paying job. Before quitting your current job, you have saved enough to anticipate conditions when you haven’t found the position.
There is no urgency for you to find work immediately. Some jobs may suit your expertise but do not offer a higher salary. You certainly don’t take them and search again. This process certainly puts you in the unemployment category for a while.
The trend during a business cycle
Frictional unemployment typically decreases during a recession. Some workers are afraid to quit and to look for new ones. They are aware that vacancies are shrinking, and it isn’t straightforward to find new jobs. As a result, they will stay even if the employer cuts wages along with the efficiency measures taken. However, during this period, the overall unemployment rate still increased due to rising unemployment cycles.
In contrast, when the economy is booming, labor demand increases. High demand makes it difficult for employers to find qualified candidates. During this period, workers feel more confident about quitting their jobs to find better jobs, which increases frictional unemployment.
Impacts on the economy
Frictional unemployment, the natural churn of workers moving between jobs, is a normal part of a healthy economy. In the short term, it’s a relatively benign phenomenon. Most individuals find new employment fairly quickly, minimizing the economic impact.
However, frictional unemployment can hold a hidden benefit. Sometimes, an increase in frictional unemployment can signal an improvement in the overall quality of the workforce. Workers seeking better opportunities due to increased skills or qualifications lead to a greater supply of qualified labor, potentially boosting productivity in the long run.
This positive scenario hinges on a crucial factor – the duration of frictional unemployment. If job searches become excessively long-winded, the initial advantages start to fade. Frustration can set in among workers facing extended periods of unemployment, leading to a decline in motivation and potentially even a decrease in their overall skillset.
Therefore, while frictional unemployment itself isn’t inherently negative, it’s essential for an economy to maintain a healthy flow of workers transitioning between jobs. This minimizes the risk of long-term unemployment and its associated downsides for both workers and the broader economy.
Combating fictional Unemployment
Frictional unemployment, while a natural part of the job market, can be minimized through targeted strategies. Here, we explore two key approaches:
Enhancing job market transparency
In today’s digital age, the internet plays a crucial role in facilitating the flow of job market information. Online job boards provide a wealth of details, including types of vacancies, required skills, and even salary ranges offered by employers.
This transparency empowers workers with the knowledge they need to make informed decisions and effectively target their job search, potentially leading to swifter transitions between jobs. Additionally, with salary information readily available, salary negotiations during interviews can become more streamlined.
Promoting worker skill development and mobility
Governments can play a significant role in fostering worker mobility and adaptability. By providing incentives to employers who offer flexible work arrangements and opportunities for employees to develop and diversify their skillsets, workers are better equipped to navigate job transitions.
This approach ensures that even if a company goes bankrupt or downsizes, workers possess a broader range of skills they can leverage to find new opportunities, minimizing the duration of their unemployment period.
