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Understanding Frictional Unemployment: Causes and Solutions for a Dynamic Job Market

Understanding Frictional Unemployment: Causes and Solutions for a Dynamic Job Market

Understanding Frictional Unemployment

A frictionally unemployed individual voluntarily transitions to new positions. This is not a bad thing for the economy. Rather, it is actually a sign of a strong economy. If organizations can understand this metric, they shall be able to understand why employees leave companies, and then they can improve their rate of employee retention.

In this article, you will learn some of the essentialities of frictional unemployment. We shall start with the frictional unemployment definition, and then we shall discuss some of the major causes of this situation. Then, we shall look at the major impact caused by frictional unemployment. Hence, to find out more about this economic occurrence, read on through to the end of the article.

What Is Frictional Unemployment?

Frictional Unemployment is the result of voluntary transitions of employment by professionals in an economy. This is actually a good sign for the economy, as it shows that the economy is stable and is growing steadily. A simple frictional unemployment example is where workers in an economy change their jobs by moving from one organization to another as new workers enter the economic workforce.

This creates a temporary period of unemployment. It is part of natural unemployment and is hence present when the economy has full employment.

According to Corporate Finance Insitute,

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.

Such a situation happens in all types of economies, especially the healthy ones. It is kind of normal where an employee might seek opportunities where the pay is better for the work done, or the employee might transition because of a job that is more suitable.

How To Calculate Frictional Unemployment?

To calculate frictional unemployment, you will need to take the workers in the economy that are actively looking for jobs and divide the data by the total number of labor forces in the economy.

Frictional Unemployment Percentage = (Workers Actively Looking For Jobs/ Total Labor Force) x 100

The aforementioned equation will give you the percentage of frictional unemployment. However, in regards to the workers that are actively looking for jobs include workers that are new to the economy, workers who left their jobs, and workers that are returning to the workforce.

What Are The Major Causes Of Frictional Unemployment?

According to Wall Street Mojo,

Frictional unemployment emerges from the growing career goals of individuals. It differs from other unemployment types as job seekers in frictional unemployment don’t go out of work due to automation or recession. Instead, they quit their current jobs to find a more suitable employer or were new entrants who had just winded up their studies.”

However, the causes behind the occurrence of frictional unemployment can be manifold. The following are the major ones:

1. Entry Of New People In The Labor Market

As first-time job-seekers and recent graduates lack the efficiency and the resources to find a suitable job, they do not start abruptly and wait for jobs that pay better. Hence, they also make transitions, like moving to a city with better opportunities. This factor adds to frictional unemployment due to the time gap.

2. Workers Looking For Better Pay Or Personal Reasons

If workers are quitting jobs due to better pay, it creates frictional unemployment. The reason can also be due to workers leaving their jobs to upskill themselves for better income in the future. In other cases, workers might leave their jobs due to personal reasons like family concerns, pregnancy, sickness, retirement, etc.

3. Workers Looking For Better Job Opportunities

If workers are leaving their jobs despite not having another one for better opportunities, it is an indication that they believe that the economy is strong enough that there is no fear of unemployment. This is called Quit Rate, as it has become a tracker of consumer confidence in the economy.

This situation can also occur when individuals in an economy got enough time to build their savings and resources so that they can handle months of unemployment.

Impact Of Frictional Unemployment In An Organization

There are negative implications of frictional unemployment too. According to Investopedia,

When frictional unemployment is high, employers may find it difficult to retain talent. Frictional unemployment often means workers may be comparing different offers, waiting for strong opportunities, and requiring investment from their company to be retained.”

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On the other hand, frictional unemployment can also be the result of a strong and robust economy. Employees are seeking better opportunities. This means that there are actually better opportunities in the economy. This shows that the economy is functioning well.

The occurrence of frictional unemployment shows that the economy has a free-moving labor force. This means that the individuals in the economy are seeking better opportunities as per their own choices.

How To Limit Frictional Unemployment?

If frictional unemployment exceeds more than a certain level, it can create problems for the economy and can weaken it. Hence, it is important for regulators of the economy to monitor levels of unemployment and ensure that necessary actions are taken by organizations:

1. Frictional unemployment results due to a low transfer of information between employers and employees. The usage of social media platforms and online job boards can help in reducing such mismatches faster.

2. Organizations should ensure that there are fewer prejudices against workers, jobs, and locations. Employers should also limit partialities with certain workers.

3. Employers must consider providing more flexibility to prospective employees. This will make the available jobs more compelling for the ones that are seeking new jobs.

Bottom Line

Frictional Unemployment is a situation when professional individuals intentionally leave their current jobs to pursue different ones. It occurs because of voluntary transitions of employment in an economy. This shows that the economy is in its growth phase and is stable.

Frictional Unemployment also occurs when workers change their employment and new workers also enter the workforce. What are your own opinions of this type of unemployment? Share your thoughts about the matter with us in the comments section below.

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