Frictional Unemployment

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

Unemployment is a situation in which a person can work at an existing wage rate both physically and mentally, but does not have a job to work. The consequence of work changes within an economy is frictional unemployment.

There is, of course, frictional unemployment even in a growing, stable economy. Workers who leave their jobs or new workers who enter the workforce both add to frictional unemployment.

Causes

Frictional unemployment is caused by inappropriate adjustments between labour supply and labour demand. This type of unemployment is due to labour immobility, lack of accurate and timely information, the seasonal nature of work, and other reasons.

The frictional unemployment rate is calculated by dividing workers by the total labour force actively seeking jobs. Workers who are actively searching for jobs classified into three categories: workers who have left their jobs, people who have returned to work, and new entrants.

Effects

Despite being counterintuitive, frictional unemployment benefits an economy as it is an indicator that people are looking for better positions. Frictional unemployment is not as troubling as the other forms of unemployment; it is typically the result of the choice of a worker. Frictional unemployment also helps businesses as they have a wider selection of potentially highly qualified job applicants.

Frictional unemployment is less than cyclical unemployment. In a recession, cyclical unemployment predominantly caused by firms laying off employees. Workers have no choice but to leave their jobs with cyclical unemployment while the workers have chosen to leave frictionally. However, frictional unemployment tends to decline in a recession with rising unemployment, as workers are usually afraid to leave their jobs to try to find a better one.

How To Reduce It

By quickly matching prospective job seekers with job openings, frictional unemployment can be reduced. Workers can use social media and job-listing platforms to search for jobs. Developments on the internet can lead to faster turnaround times in recruiting and reducing the frictional rate of unemployment.

Frictional unemployment is the only form of unemployment that is not decreased or impacted by the RBI government economic stimulus. For example, the RBI could lower interest rates to encourage the economy borrowing. The additional borrowings tend to generate more consumer and business spending, resulting in inflation and reduced unemployment.