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NATURAL UNEMPLOYMENT RATE: The rate of unemployment that occurs when the economy is at full employment. This rate is primarily composed of frictional and structural unemployment.

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FRICTIONAL UNEMPLOYMENT:

Unemployment attributable to the time required to match production activities with qualified resources. Frictional unemployment essentially occurs because resources, especially labor, are in the process of moving from one production activity to another. Employers are seeking workers and workers are seeking employment, the two sides just have not matched up. This mismatch is largely the result of limited information, which is often compounded by geographic separation between producers and resources. Frictional unemployment is one of four unemployment sources. The other three are cyclical unemployment, seasonal unemployment, and structural unemployment. Frictional and structural unemployment are the two components of natural unemployment.
The key with frictional unemployment is that labor and other resource markets do not function flawlessly. Buyers do not instantaneously match up with sellers and sellers do not instantaneously match up with buyers. It takes time for employers to search through the pool of available applicants to select the one best qualified for the job. It takes time for job-seekers to search through available openings to find the one that best suits their qualifications.

The presumption underlying frictional unemployment (which distinguishes it from cyclical or structural unemployment) is that a suitable job exists for each unemployed worker. The employer and worker either do not know about the other, or if they do know, they are located in different parts of the country. The "friction" of frictional unemployment is the cost involved in searching (taking out want ads, preparing resumes, interviewing applicants, etc.) or relocating (driving to another city, renting a moving truck, etc.).

For insight into frictional unemployment, consider the situation of Benji Boatsman, the assistant manager of the Funky Skunk CD Super Store (which boasts the largest selection of music CDs in Shady Valley). While Benji likes his job, word has come through the grapevine that the Quadra DG Computer Works plant in nearby Oak Town is hiring workers. Benji does not know for sure what the Quadra DG Computer Works job might entail, but he suspects the pay is better.

So Benji quits his Funky Skunk job on Friday, packs his belongings and moves to Oak Town over the weekend. It takes him a few days to settle into his new domicile, before heading off to the Quadra plant. Of course, he has no idea where the plant is located in Oak Town, and spends the better part of Wednesday randomly driving around the wrong part of town. By Thursday, he finds the Quadra plant location, but discovers he needs to set up an appointment with the personnel director, which he does for the following Tuesday. After a series of evaluation tests the ensuring Wednesday and Thursday, Benji discovers that the Oak Town Quadra plant is not actually hiring any new employees, not right now anyway.

But the Quadra personnel director has heard that The Wacky Willy Company, located in Shady Valley, might be looking for workers. So Benji, packs his possessions once again and heads back to Shady Valley. After a few days of seeking employment at The Wacky Willy Company, which is not hiring anyone either, Benji stumbles onto an assistant manager job at the Guettenburg Book Emporium (which boasts the largest selection of books in Shady Valley). Ironically, the Guettenburg Book Emporium, located only a few blocks away from the Funky Skunk CD Super Store, had been searching for an assistant manager for months.

During the time he left his assistant manager position at the Funky Skunk CD Super Store until he assumed the assistant manager position at the Guettenburg Book Emporium, Benji was frictionally unemployed. The job was there, he was available, it just took a few weeks to match up.

The Bad

Frictional unemployment is not necessarily bad for the economy. However, there are a few problems.
  • Personal Hardships: The primary problem with frictional unemployment, like any type of unemployment, is the personal hardships inflicted on the unemployed workers. Even if frictionally unemployed workers obtained income from unemployment compensation, welfare, and other transfer payments, they cannot purchase as many goods and services and thus experience a drop in living standards.

    During Benji's excursion through frictional unemployment, his income dropped from a comfortable assistant manager's pay to zero. Benji largely lived off his savings account.


  • Lost Production: Moreover, the month or so that Benji was between jobs, the economy lost out on his productive activity. The Funky Skunk CD Super Store was without an assistant manager, which forced the manager to work overtime, which reduced his sense of well-being. This might have been a small blip in a multi-trillion-dollar annual gross domestic product, but it was a blip nonetheless. And considering a few million workers are frictionally unemployed at any given time, these seemingly insignificant blips add up to significant lost production for the economy.

The Good

Lost production and personal hardships are certainly undesirable, but the benefits of frictional unemployment might actually overshadow these problems. Frictional unemployment is an inherent part of any complex economy that occurs because resources are reallocated from one production activity to another. Such reallocation makes it possible for resources to seek out the production activity for which they are best qualified.

Benji Boatsman is actually a better bookstore assistant manager than a CD store assistant manager. But this would never be known if Benji had never left his CD store job. In all likelihood, Benji will leave his bookstore job, once again becoming frictionally unemployed, until he finds an even better (that is, more suitable and more productive) job.

Eliminating frictional unemployment can only be achieved if resources are "locked" into a production activity. Any resources that did switch production activities would have to do so instantaneously. Leave one job on Tuesday, start a new one on Wednesday. Such efficiency is virtually impossible for a modern complex economy.

And The Policies

While totally eliminating frictional unemployment is probably unwise, if not impossible, it can be reduced by improving the efficiency of resource markets, in particular, by reducing the cost of information search. If Benji had known about the assistant manager position at the Guettenburg Book Emporium, he might have quit one job on Tuesday and started his new one on Wednesday, without any frictional unemployment.

As a matter of fact, one prime benefit of the computer revolution and widespread use of the Internet, has been to reduce information search cost in the labor market. Rather than spending hours scanning the want ads or days pounding the pavement, a job seeker can spend a few minutes searching the World Wide Web for available jobs. Any policies that further improve the efficiency of such information search are bound to reduce frictional unemployment.

Of some importance, expansionary fiscal and monetary policies have little if any long term affect on frictional unemployment. While stimulating the economy can reduce frictional unemployment temporarily, so long as the basic operation of resource markets and the efficiency of information search remain the same, frictional unemployment eventually returns to its "natural" level.

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Recommended Citation:

FRICTIONAL UNEMPLOYMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: July 28, 2014].


Check Out These Related Terms...

     | unemployment sources | cyclical unemployment | seasonal unemployment | structural unemployment | natural unemployment | unemployment rate | Current Population Survey | labor force | unemployment problems | employment-population ratio | alternative unemployment rates | unemployment reasons |


Or For A Little Background...

     | unemployment | factors of production | full employment | business cycles | contraction | recession | circular flow | macroeconomic goals | macroeconomic problems |


And For Further Study...

     | labor force participation rate | unemployment, production possibilities | full employment, production possibilities | macroeconomic sectors | Bureau of Labor Statistics | real gross domestic product | macroeconomic markets | resource markets | inflation | stabilization policies | government functions |


Related Websites (Will Open in New Window)...

     | Bureau of Labor Statistics |


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