Finding a job can be kind of like dating. When a new graduate enters the labor market, she may have the opportunity to enter into a long-term relationship with

Finding a job can be kind of like dating. When a new graduate enters the labor market, she may have the opportunity to enter into a long-term relationship with several companies that aren’t really a good fit. Maybe the pay is too low or the future opportunities aren’t great. Before settling down with the right job, this person is still considered unemployed. Specifically, she’s experiencing frictional unemployment.

In the United States’ dynamic economy, this is a common state of short-term unemployment. Companies are often under high levels of competition and frequently evolve. They go out of business or have to lay off workers. Or maybe the worker quits to find a better position. In fact, millions of separations and new hires occur every month accompanied by short periods of unemployment.

Frictional unemployment helps allocate human capital (i.e. workers) to its highest valued use. Hopefully, workers are similarly finding themselves with more fulfilling jobs. Even when it’s caused by an event such as a firm going out of business, frictional unemployment is a normal part of a healthy, growing economy.

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Frictional unemployment is short-term unemployment caused by the ordinary difficulties of matching employee to employer. The moment a student graduates, for example, and starts to look for work, they're officially unemployed. After a few weeks of applications and interviews, the student might be offered a job, but perhaps the pay is too low, or the location not quite what the student wanted. The student remains unemployed. Only after a few weeks more does the student find and accept a job and officially exit unemployment and enter employment. The student's period of unemployment -- that's frictional unemployment.


Now frictional unemployment -- it's ever-present, because the U.S. economy is very dynamic. To see this dynamism, let's take a closer look at some of the job statistics. We often hear on the news that, say, 200,000 new jobs were created or lost this month. Here's a graph of net employment changes. You can see the big recession in 2008 and 2009. When in the worst months as many as 800,000 jobs were being lost. Since the end of 2010, you can also see the recovery, where there have been a little more than about 200,000 jobs created every month. Now, these figures -- they are useful, but it's important to understand that they're net changes. When the news reports that 200,000 new jobs were created this month, what actually happened is that there were around 4.5 million new hires and 4.3 million new separations, that is quits or layoffs.


So, the net number -- it hides the vast amount of job change which is actually happening behind the scenes. Every month, millions of people quit their jobs -- sometimes to get a new job, sometimes to go back to school, sometimes to retire. Other people start new jobs after graduating or finding new opportunities. This all causes frictional unemployment and it's a normal part of a dynamic economy. Now sometimes changing jobs isn't by choice. People lose their jobs due to a firm going bankrupt, downsizing, or moving locations. But that can also be part of a healthy economy.


When firms compete, some will naturally do better than others at delivering the products and the services that consumers actually want. We used to fly Pan Am, eat at Bob's Big Boy and choose our top 10 friends on Myspace. These firms, however, they've disappeared, while others such as Southwest Airlines, Shake Shack and Facebook have grown. It's easy to see these big changes. Less obvious are the smaller changes that occur every day. But all of these changes are important because they move resources across the economy from where those resources have low value to where the resources have high value.


So, short-term, frictional unemployment -- it's inherent in a growing and changing economy. And overall, it's a small price to pay for growth and change. More serious, however, are the two other types of unemployment: structural unemployment and cyclical unemployment. That's what we'll turn to next.