Frictional Unemployment

Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences. Frictional unemployment includes people who do not have jobs because they are new entrants into the labor force (and have not found a job yet) or people who are voluntarily between jobs. A full-time college student, who does not have a job and is not looking for one, is classified as not in the labor force. When the student nears graduation and begins to look for a job, however, the student becomes frictionally unemployed and is included in the unemployment statistics. Job search is the process by which workers find appropriate jobs given their skills and preferences.

One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings. Since jobs are the main source of income for most families, the unemployment insurance program is designed to provide enough income so the family’s basic needs can be met after the worker becomes unemployed. In the absence of the unemployment insurance program, many workers would have an urgent need to find another job to avoid significant hardships. When the government provides unemployed workers with income, however, the urgency of finding a new job is reduced for many of these workers. Some workers do not search for a new job in earnest until their unemployment benefits are close to being terminated. Thus, unemployment insurance increases frictional unemployment by increasing the amount of time workers take between losing a job and finding a new one.

The remedy for frictional unemployment is anything that reduces job search, such as providing better information about available jobs or reforming the unemployment insurance program.
Before the pervasiveness of the Internet, information about job openings was not readily accessible. Consequently the U.S. Department of Labor sponsored employment offices is most cities of at least moderate size. These offices maintained listings of available jobs. The Internet has made it much easier for people to learn about available jobs, across the country and around the world.

Several experiments have been tried with reforms of the unemployment insurance program. When the government has allowed unemployed workers to collect benefits for a maximum of 26 weeks, some people do not search for a new job in earnest until the 24th or 25th week. So one reform that has been tried is to offer a cash bonus if workers find a new job quickly. For example, recipients have been offered a cash bonus if they find a job during the first 13 weeks of receiving benefits. Taxpayers benefit from this reform because the bonus is less than the benefits that would be paid during the second 13 weeks of payouts.