What is employment?

Employment is between two parties usually based on contract where work is paid for, where
one party, which may be a corporation, for profit, not-for-profit organization, co-operative or
other entity is the employer and the other is the employee.

Employment implies work for which one has been engaged and is being paid by an
employer.

Occupation implies work in which one engages regularly especially as a result of

training.

7 Causes of Unemployment

1. There are seven causes of unemployment.

2. Four causes create frictional unemployment.
3. This type of unemployment is when employees leave their job to find a better one.
4. Two causes create structural unemployment. That is when workers' skills or income
requirements no longer match the jobs available.
5. The seventh cause leads to cyclical unemployment.1

1. Frictional and structural unemployment occur even in a healthy economy.

The natural rate of unemployment is between 4% and 5%, according to the Federal
Reserve.
2.
The Bureau of Labor Statistics (BLS) defines unemployed people as those who are
jobless and have actively looked for work in the past four weeks as well as those who
have been temporarily laid off from a job. If they don't keep looking, the Bureau of
Labor Statistics doesn't count them in the labor force.

Frictional unemployment is a type of unemployment that occurs when workers are
searching for new jobs or are transitioning from one job to another.

It may also be called 'search unemployment', it is present in all types of economics,
including healthy ones, and it is part of natural unemployment. It can be caused by
various reasons, such as workers quitting their current jobs, fresh graduates looking
for first jobs, workers ending their career break, or workers being fired or laid off. It is
a temporary situation4 that involves time delays in finding new employment.

Four Causes of Frictional Unemployment

 One cause of unemployment is voluntarily leaving the workforce. Some of the

unemployed have saved enough money so they can quit unfulfilling jobs. They have
the luxury to search until they find just the right opportunity.
 The second cause is when workers relocate. They are unemployed until they find a
position in the new town.
  The third cause is when new workers enter the workforce. This includes students who
graduate from high school, college or any higher degree program. They look for a job
that fits their new skills and qualifications. That is a primary cause of youth
unemployment.
 The fourth cause is when job seekers re-enter the workforce. These are people who
went through a period in their lives when they stopped looking for work. They could
have stopped working to raise children, get married or care for elderly relatives.
 These four causes are an unavoidable part of the job search process. The good news is
that frictional unemployment is usually voluntary and short-term.
 Frictional unemployment, also known as search unemployment, occurs when
individuals leave one job to search for another in a healthy economy.
 Many factors can influence someone's decision to leave their job, such as deciding to
relocate or putting their career on hold to care for a loved one.
 Learning about frictional unemployment can help you understand why it occurs and
how companies can take action to reduce it.

8 causes of frictional unemployment

Here are eight causes of search unemployment:

1. Skills gap

When individuals believe their current skills and knowledge are underdeveloped, they may
feel like they can't perform tasks adequately in a role. They may decide to leave their
employer and pursue work more commensurate with their skill level. If they leave the
organisation before securing alternative employment, they enter the category of search
unemployment.

2. Relocation

A person might decide to relocate to live in a more affordable area, to be with a loved one or
to pursue new career opportunities. They may have to leave their job as a result because it's
no longer a viable option to travel to the workplace each day. Someone in this context
experiences search unemployment until they secure a new job.

3. Family care

There can be situations where an individual needs to take extended time off work to care for a
sick or injured family member. It can also be common for parents to put their careers on hold
for a year or longer while they care for their new baby. Individuals in these contexts often
experience frictional unemployment until they return to the workforce.
4 New to the workforce

Recent university graduates and first-time job candidates may lack the experience required to
secure employment in their desired field. These individuals may also only apply for work that
interests them or that meets their pay expectations. This can lead to search unemployment
that's temporary or long-term, depending on the strength of the economy and how long
someone in this situation is willing to wait for ideal employment.

There can also be occasions when recent university graduates enter their desired industry for
the first time and it doesn't offer them the job satisfaction they had expected. For example, a
graduate teacher might enter the education system and feel overwhelmed by the workload
and extra hours they're required to work to grade student performances and design lessons.
This may lead them to leave their job and put their career on hold while they search for
alternative employment options.

5. Employee dissatisfaction

During times of economic recession, dissatisfied employees may tolerate their work
environment because they're unsure whether pursuing alternative employment is a viable
option. When the economy is healthy, there are often more employment opportunities
available. This is typically the time when unhappy employees feel motivated to leave their
job. Rather than waiting until they've secured a new job, they may decide to leave the
organisation, resulting in frictional unemployment. Some reasons an employee may
experience job dissatisfaction and wish to leave their employer can include poor working
conditions, excessive responsibilities and a below-standard remuneration package.

6. Advanced education options

Some individuals may wish to return to university and pursue advanced qualifications within
their profession. If an employer is unwilling to support them while they study or offer them
the option of working part-time, they might decide it's in their best interest to leave the
organisation. During their period of study obligations, which could range from one to several
years, individuals in this context might experience search unemployment until they've
completed their qualifications and are ready to resume working.

7. Unemployment benefits

As of April 2022, Australians aged between 22 and pension age are eligible to
receive unemployment benefits and other forms of social security. While this can help those
who require financial assistance, it may also lead to search unemployment by allowing some
to be selective about their employment options. For example, someone receiving
unemployment benefits might decline a number of job opportunities and decide to wait until
they can secure a more ideal opening.
8. Career break

A career break is unpaid leave that lasts longer than two months. Some professionals may
spend years in their chosen industry and decide to take a break from their career to re-
energise and regain motivation. For example, someone who's worked for ten years without a
break might choose to take six months off to travel the world or engage in a passion project
like writing a book. Individuals who voluntarily take a long period of absence from their
career enter the category of frictional unemployment.

Causes of Frictional Unemployment

New Entrants Into Labour Market

Recent graduates from school and other first-time job seekers may lack the resources or
efficiency for finding a company that has an available and suitable job for them. As a result,
they don’t take on other work, temporarily holding out for better-paying jobs. Temporary
transitions—such as moving to another town or city—will also add to frictional
unemployment, as there is often a gap in time between when workers quit their job and when
they find new ones.

Search for Greater Meaning

Workers quitting their job to look for better pay add to frictional unemployment. In other
cases, workers may resign from their job to go back to school or learn a new skill because
they believe they need the skill to earn more income. Others might leave the workforce for
personal reasons, such as to care for a family member, sickness, retirement, or pregnancy.
When the workers return to the workforce to look for a job, they’re counted as part of
frictional unemployment.

Looking for New/Better Jobs

The phenomenon of people quitting their job without having another one to move into to is an
indication that they "believe" the economy is robust enough to not fear unemployment. In
recent years it's become a closely tracked indicator of consumer confidence, called the "Quit
Rate." This phenomenon is also more likely to occur when individuals have had time to build
up their savings, having resources on hand to handle months of unemployment.

Unemployment Benefits

Unemployment benefits paid by the government can sometimes lead to frictional

unemployment because the income allows workers to be selective in finding their next job,
further adding to their time unemployed. It can also occur due to companies abstaining from
hiring because they believe there are not enough qualified individuals available for the job.
Frictional unemployment can be a positive sign that workers are voluntarily seeking better
positions, providing businesses with a wider array of qualified potential employees.

Impact of Frictional Unemployment

Like all other forms of unemployment, there are downstream implications that impact
companies and management. 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.

Frictional unemployment also tends to mean the economy is doing well. Employees are more
willing to seek better opportunities when there are more opportunities to browse; this likely
occurs when the economy is fully functioning and companies have a larger number of open
positions.

Last, frictional unemployment may have implications on how people live their lives. Friction
unemployment indicates that people may be inspired to seek out other work opportunities.
Similarly to how COVID-19 may have put certain work tendencies in perspective for some,
friction unemployment may mean that people are more concerned about a greater purpose
and seeking better livelihoods.

Advantages of Frictional Unemployment

Frictional unemployment always exists in an economy with a free-moving labor force and is
beneficial because it’s an indicator that individuals are seeking better positions by choice. It
also helps businesses because it gives them a wider selection of potentially highly qualified
candidates applying for positions. It is short-term and thus does not place much of a drain on
government resources.

Frictional unemployment is reduced by quickly matching prospective job seekers with job
openings. Thanks to the internet, workers can use social media and job-posting websites to
search for jobs, which can lead to quicker turnaround times in getting hired.

Frictional Unemployment vs. Other Types of

Unemployment
Cyclical Unemployment

Frictional unemployment is not as worrisome as cyclical unemployment, which is

predominant in a recession and caused by businesses laying off employees. In a recession
with unemployment rising, frictional unemployment actually tends to decline because
workers are usually afraid to leave their jobs to look for a better one.
Seasonal Unemployment

Seasonal unemployment is the situation where workers are unemployed during certain times
of the year as a result of decreasing demand. As seasons change and demand fluctuates,
certain jobs return. Seasonal unemployment often doesn't last, as the peak season often means
many workers become employed once again.

Structural Unemployment

Structural unemployment is a more serious form of unemployment. This type of

unemployment occurs when there are fundamental structural changes to the economy such as
changing industries. For example, consider how environmentally-friendly solutions have
replaced less eco-friendly options. As consumer demand changes to green solutions, jobs
from less desirable industries begin to close.

Frictional Unemployment and Economic Stimulus

Frictional unemployment is the only form of unemployment that is largely unaffected by
economic stimulus from the government. For example, during bad economic times, the
Federal Reserve Bank might lower interest rates to encourage borrowing. The hope is that the
added money will spur spending by consumers and businesses, leading to growth and a
reduction in unemployment. However, added money doesn’t address the causes of frictional
unemployment, except perhaps in giving some workers the courage to become unemployed
while searching for a new job. Still, as noted above, a challenging economic landscape would
probably forestall such a choice.

What Is the Main Cause of Frictional Unemployment?

Frictional unemployment is mainly caused by voluntary conversions to new jobs within a
highly functioning economy. Frictional unemployment is often caused by people willingly
step aside from their job to seek jobs with better pay, opportunity, or work-life balance.

Why Is Frictional Unemployment a Problem?

Frictional unemployment may be difficult on employers as employees are more willing to
voluntarily step aside from their jobs. Companies must be mindful to invest resources in top
performers, else those individuals are likely to look for other opportunities. On the other
hand, frictional unemployment may also be difficult on job-seekers. Because more people are
voluntarily looking for a job, there may be more competition that makes it more difficult for
workers to find new roles.

What Is the Difference Between Frictional and Cyclical

Unemployment?
Cyclical employment is the natural ebb and flow of the economy. As the economy develops,
more jobs are created and more workers are employed. As the economy cools, those jobs may
be eliminated and cyclical unemployment occurs. On the other hand, frictional
unemployment occurs usually when the economy is doing well. Frictional unemployment is
when workers voluntarily seek out other opportunities to better their lives and careers.

The Bottom Line

Frictional unemployment is a natural economic occurrence that happens when the economy is
usually doing well. Workers decide it may be time to seek better opportunities, return to
school, care for family, or simply improve their lives outside of work. Frictional
unemployment is still problematic to the economy, though it is not as permanent as structural
or cyclical unemployment.

KEY TAKEAWAYS

 Frictional unemployment is the result of voluntary employment transitions within an

economy.
 Frictional unemployment occurs in a growing, stable economy.
 Workers moving from job to job and new workers entering the workforce contribute
to frictional unemployment.
 Frictional unemployment is also caused by those deciding to prioritize taking care of
their family, returning to school, or finding purpose in life.
 Frictional unemployment differs from cyclical unemployment (the natural ebb and
flow of an economy) as well as structural unemployment (changes to industries)