Revision: Frictional and Structural Unemployment

This revision update looks at the difference between frictional and structural unemployment…

Frictional Unemployment

Frictional unemployment is transitional unemployment due to people moving between jobs:

For example, redundant workers or people joining the labour market for the first time such as university graduates may take time to find the types of work they want at wage rates they are prepared to accept. Many are unemployed for a short time whilst involved in job search.

Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available jobs. Incentives problems can also cause some frictional unemployment as some people looking for a new job may opt not to accept paid employment if they believe the tax and benefit system will reduce the net increase in income from taking work. When this happens there are disincentives for the unemployed to accept work.

In short, frictional unemployment happens when it takes time for the labour market to match the available jobs with those people seeking work. The chart below is linked to this cause of unemployment because it shows the monthly level of unfilled vacancies in the UK. Stripping out the effects of seasonal variations in the demand for labour, we see that in the summer of 2008 there were still well over 600,000 vacancies at a time when unemployment was 1.65 million. If the economy was better at filling these jobs, it could achieve a much lower level of unemployment.

Structural unemployent

Structural unemployment occurs when there is a long run decline in demand in an industry leading to a reduction in employment because of international competition.

Globalisation is a fact of life and inevitably it leads to changes in the patterns of trade between countries from year to year. Britain has probably now lost forever, its cost advantage in manufacturing goods such as motor cars, household goods and audio-visual equipment, indeed our manufacturing industry has lost over 400,000 jobs in the last five years alone as production has shifted to lower-cost centres for example in Eastern Europe and emerging market countries in Far East Asia. Many of these workers may suffer from a period of structural unemployment, particularly if they are in regions of above-average unemployment rates where job opportunities are scarce.

Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities.

Many of the unemployed from manufacturing industry (e.g. in coal, steel and engineering) have found it difficult to find new work without an investment in re-training. This problem is one of occupational immobility of labour and it is a supply-side cause of unemployment