Question

A politician makes the following argument: ‘The economy would operate more efficiently if frictional unemployment were eliminated. Therefore, a goal of government policy should be to reduce the frictional rate of unemployment to the lowest possible level.’ Briefly explain whether you agree with this argument.

Answer 1

First thing we need to note about frictional unemployment is that it is a short term phenomenon & it is an unemployment by choice.In macro economic sense it is not a catastrophe situation. it is a problem that will resolve itself in a given matter of time. Also we need to note is that Frictional unemployment is not caused by a shortage of jobs in the economy. It does not happen because job seekers are more than job providers.

Sharing below 3 examples to explain it better.

Example1: John wants to change his job for whatever reason ( could be dissatisfaction in present job,taking a break and getting a clarity on what he wants,exploring other options , changing his physical location,skills, payment, work-time, location, seasonal industries, attitude, taste, etc) so now he has willingly resigned and is taking a break before he finds something worthwhile.

Example 2 : Jenny has is a fresh college graduate from the top law school . she is getting a lot of job offers from cafe,modelling agencies but it is not suiting her job profile. so she is waiting for the right job to come her way.

Example 3: Also, a lot of time, employers wait for an existing employee to quit the job before they take a new one on board. Hence, even if Jeremy has a job in hand where he will work on a future date, presently he will be classified as frictionally unemployed.

In 2 of the above cases John and Jenny chose to remain unemployed and explore the job search period willingly. they have the resources to manage them during the gestation period. That is why this gestation period will not lead to any social evils of frustration.

So for the betterment of the economy frictional unemployment can never be zero.usually anything around 2-5% is considered healthy. Economy can be in full employment equilibrium along with the slight frictional unemployment.

so i do not agree with the statement that the economy would operate more efficiently if frictional unemployment is zero. zero frictional unemployment would affect economic growth and exhaust possibilities of improvement in lifestyle and increasing efficieny. During recession the patience to wait for the desired job reduces & people are more concerned about job security , therefore they pick up a less desirable job and frictional unemployment reduces . However it means people are settling and compromising with something not-desirable to them which would only lead to a frustration later and lower the efficiency of the employee and the economy. as long as a 2-5% frictional unemployment can be maintained it is good for the economy,it would be a natural rate of unemployment. Infact it is due to frictional unemployment that the employers find a wide pool of human capital to pick from. Imagine if every worker who was offered a job and he accepted the first job that came his way , the distribution of workers and jobs would be quite inefficient. so slight frictional unemployment is good to find the best employer employee match.it is due to frictional unemployment that companies may gain access to more qualified employees.

But if this continues for a very long duration and for a higher percentage of the population then the government has to step in and offer unemployment benefits such as unemployment insurance (to allevate short term hardship and allow more time for job search), provide education,advice,skill training etc.Job portals need to be well developed so that they can match the job seekers to the right job providers. this is because long periods of frictional unemployment has disadvantages on the economy.  There will be an increasing frustration among job-seekers that can lead to a decrease in productivity. Moreover, longer frictional unemployment may result in a production decline in the economy.

How can the frictional unemployment be checked. Let us list below some options.

1.Better coordination and information transmission between job seekers and employers. this can happen through a well developed job portals.this will reduce the matching time between job seekers and employers and therefore lower the unemployment rate.Most of the time employees are not aware where is the desired job and how to get in touch with the employer. Therefore, searching the right employer is taking time and they are therefore being classified as unemployed. that is why the information system in the economy has to be improved to reduce the frictional unemplyment.

2.Ofcourse these job portals need to be unbiased themselves and not have any personal prejudices.

3.these regulators can encourage employers to be more flexible in their employee search and make decent offers to the employees.

4. developed countries already have a well developed job portal, however the developing countries need to pattern the same measures as adopted by developed countries so that they reduce the frictional unemployment to the desired rate.

Frictional unemployment is not alarming because it does not correlate with social evils or reduce the economic efficiency. However if it crosses the ideal rate and goes for a long time then it is a matter of concern and needs to be catered to.