Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Frictional Unemployment

What it is:

Frictional unemployment refers to the portion of the unemployment rate that results from labor market turnovers. This unemployment is ongoing and includes job transitions and communication lags between employers and potential employees, people entering and exiting the labor force and from the constant creation and destruction of jobs.

How it works (Example):

Frictional unemployment can be illustrated by someone who leaves their current job to look for another. Until they successfully find and begin another job, they are temporarily unemployed.

Another example would be a recent college grad who suddenly becomes available in the job market, but has yet to find his first job.

Why it Matters:

Since frictional unemployment results from temporary or incidental factors, it is a portion of the unemployment rate which bears less importance as an indicator of the health of the economy.

In addition, the perpetual and disparate instances of frictional unemployment mean that even when the unemployment rate is very low, it will never be zero. This is called the "natural rate" or unemployment.

Other categories recognized by economists include cyclical unemployment and structural unemployment.