Macroeconomics

Frictional Unemployment: Meaning, Causes, Solutions

Updated on April 12, 2022 · By Ahmad Nasrudin Tag: Frictional Unemployment, Unemployment

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Structural unemployment exists because workers do not have 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 economic structure changes and eliminates specific skills and asks 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 is reaching its natural level, inflationary pressures increase. A further reduction in the unemployment rate will only raise the inflation rate. Hence, this situation raises 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 do in avoiding the overheated economy. One of the policies is to raise interest rates. Higher interest rates are usually at the expense of the unemployment rate as business activity shrinks, hence demands 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, 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, for the short term, you will be unemployed until you find the right employer. In addition to salary, this expectation also applies to 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.

For you, there is no urgency to find work immediately. Some jobs may suit your expertise, but do not offer a higher salary. You certainly don’t take it and search again. This process certainly makes 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, the labor demand increases. High demand makes it difficult for employers to find qualified candidates. In this period, workers feel more confident about quitting their jobs to find better jobs. That increases frictional unemployment.

Impact on the economy

In the short term, frictional unemployment is relatively harmless to the economy. It’s only a matter of time to find the right job.

Sometimes, an increase in frictional unemployment can indicate an improvement in the quality of workers. Workers want to move to a new one because they want a higher salary, considering their increased expertise. Therefore, in this case, high frictional unemployment indicates more supply of qualified workers.

But, if it continues in the long run, this unemployment problem causes frustration for workers. Due to long periods of unemployment, worker productivity can decrease.

Solutions

One way to reduce frictional unemployment is by providing workers with better vacancies information. And now, the internet facilitates the flow of such information. Not only are the types of vacancies available and the expertise needed, but some sites also list salaries offered by employers. Of course, the presence of such websites will shorten salary negotiations during interviews.

Also, governments can increase labor mobility. For example, they give incentives to employers that provide flexibility to prospective employees to improve and diversify their knowledge and expertise. So, when a company goes bankrupt or closes, workers have other skills they can rely on when fired.