Definitions
Frictional unemployment exists because both jobs and workers are heterogeneous, and a mismatch can result between the characteristics of supply and demand. Such a mismatch can be related to skills, payment, worktime, location, attitude, taste, and a multitude of other factors. New entrants (such as graduating students) and re-entrants (such as former homemakers) can also suffer a spell of frictional unemployment. Workers as well as employers accept a certain level of imperfection, risk or compromise, but usually not right away; they will invest some time and effort to find a better match. This is in fact beneficial to the economy since it results in a better allocation of resources. However, if the search takes too long and mismatches are too frequent, the economy suffers, since some work will not get done. Therefore, governments will seek ways to reduce unnecessary frictional unemployment.
Frictional unemployment is related to and compatible with the concept of full employment because both suggest reasons why full employment is never reached. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics. Frictional unemployment coincides with an equal number of vacancies. Numerically, it is therefore maximal when the labor market is in equilibrium. When for instance demand far exceeds supply, the frictionally unemployed will be few as they will get many job offers.
The frictions in the labor market are sometimes illustrated graphically with a Beveridge curve, a downward-sloping, convex curve that shows a fixed relationship between the unemployment rate on one axis and the vacancy rate on the other. Changes in the supply of or demand for labor cause movements along this curve. An increase in labor market frictions will shift the curve outwards, and vice versa. A longer term form of frictional unemployment is structural unemployment which is very similar.
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