Frictional Unemployment

Lesson 11

E>R>E phrases (to be written out from the English text) for translation by ear.

SOURCES OF UNEMPLOYMENT

Five different but overlapping forces generate five types of unemployment: frictional, seasonal, structural, cyclical, and induced. Each poses some­what unique problems for government policy.

Frictional Unemployment

People enter or reenter the work force, are fired or are permanently laid off, or voluntarily quit one job to look for another. Both firms and workers expend resources trying to match job applicants with job openings. Information about job open­ings and applicants is far from perfect, and mo­bility (e.g., relocating an employee or moving to get a job) is costly.

Frictional unemployment arises from trans­action costs incurred in matching workers with jobs. In a narrow sense, almost all unemploy­ment is frictional. Suppose transaction costs were zero. Every potential worker would know about all possible jobs, and every firm would know about all potential workers. Moreover, mobility would be costless and instantaneous. In such a world, people willing and able to work could instantly move into the (relatively) best jobs available to them, and firms could instantly fill every available job with the worker having the greatest comparative advantage in that job. The fit between workers and jobs would be op­timal.

However, it actually takes time for workers to move between jobs and for firms to find suit­able employees. Thus, many economists refer to frictional unemployment as searchunemployment. Search processes can be viewed as investments in information. Workers search for satisfying and remunerative employment, sometimes turning down several jobs before finding a po­sition that suits them. They will continue to look for a better job until the expected marginal ben­efits from further search (e.g., higher wage of­fers) no longer exceed their expected marginal costs (wages forgone while looking).

Similarly, firms search for workers with skills honed to accomplish the work required until the firms' marginal benefits (better work­ers or lower wages) no longer exceed their mar­ginal costs (e.g., forgone output and profit). Firms may make many job offers before finding someone acceptable who agrees to fill a job. (Most fast-food restaurants post semi-permanent HELP WANTED signs.) Unemployed workers often offer their labor dozens of times before landing an acceptable job. Thus, fric­tional unemployment is an unavoidable byprod­uct of normal economic асtivity. Unemployment rates naturally rise as the average duration of search increases.

The existence of frictional unemployment implies that a target of zero unemployment would be neither reasonable nor desirable. Zero unemployment would freeze all workers in their current jobs, no matter how unsatisfactory. And firms would be stuck with their current work­ers, no matter how bad the mismatch. In fact, the employed and unemployed both experience considerable turnover, a term used when work­ers change jobs. For example, employment in 1993 averaged nearly 120 million persons per month, but about 130 million different persons worked at some time during the year. While un­employment averaged around 8.7 million per month, nearly 30 million people were unem­ployed at some time during those 12 months.

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