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A complete guide to frictional unemployment (and retaining talent)

April 20, 2022 - 16 min read

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What is frictional unemployment? 

What causes frictional unemployment? 

4 impacts of frictional unemployment 

Frictional unemployment compared to other types of unemployment

Retain your talent amid frictional unemployment

Frictional unemployment. 

Believe it or not, some unemployment is natural — and it’s not necessarily a bad thing. And frictional unemployment is always prevalent. But depending on the state of the economy, frictional unemployment fluctuates. 

When workers move from job to job in search of better pay or a better skills match, that’s when frictional unemployment comes out to play. If we think about frictional unemployment in the context of today, we know we’re living in a candidate’s market. While it seems to be slowing, we’re living through the Great Resignation (or, Great Reshuffle). 

According to the Bureau of Labor Statistics (BLS), there are 11.3 million job openings. There are about 5 million more job openings than there are unemployed persons. So what does this mean for frictional unemployment? Well, it’s here. And as we’re seeing in the numbers, it’s making it that much harder to retain top talent.  

What is frictional unemployment? 

First, let’s understand the definition of frictional unemployment

Frictional unemployment isn’t necessarily a bad thing. In fact, because frictional unemployment is voluntary, it can be a sign of a healthy economy. It means that employees are seeking new jobs and new careers.

That reflects optimism about the economy, the future, and their own prospects. And while it might take time — or friction — to find that next big move, it doesn’t mean there’s a shortage of open job opportunities. 

Examples of frictional unemployment 

I was scrolling through LinkedIn last night. A connection (and friend) of mine had recently posted about a career decision. Let’s call this friend Dave.

“I’ve decided to take a break from tech. And instead of jumping into my next big move, I’m going to take some time to find the right place, the right home for me. I want to find a position where I can have an impact.

I want to find a role where I can feed my passion for youth empowerment. I’m looking for positions in the nonprofit sector. Which, I know. That’s not where I’ve spent the majority of my career. But during this time of unemployment, I’ll be looking for the right move, not the next move. Until then, I’ll be hanging with my girls.” 

Dave posted this alongside a photo of his two daughters. He quit his job but didn’t have another job lined up. Though Dave knows that he wants to transition to a different career path. He doesn’t want to continue to climb the corporate ladder in tech. He wants to pivot. He wants to find something that aligns with his purpose and his values. This is just one example of frictional unemployment.

What causes frictional unemployment? 

It’s rare that we deem unemployment to be a good thing. But an increase in frictional unemployment signals the economy is healthy — and job opportunities are plenty. 

So, let’s look at this topic from where we are today. There are millions more job openings than job seekers. Employees have been quitting their jobs en masse. And people everywhere are looking for a deeper meaning in their life. And as such, they may voluntarily choose to be unemployed for the short term. Here are four common reasons. 

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Dissatisfaction with the current company or role 

The pandemic forced everyone to ask themselves these questions: What really matters in life? Am I happy with my role? Is this what I want to be doing? What should I be doing with my life

And as we are seeing in the Great Resignation, employees were dissatisfied. Employees’ mental health took a steep decline. In fact, 55% of employees reported being in a state of languishing

But beyond employee satisfaction, employees are also demanding more from their employers. According to a survey conducted by Ernst & Young, data backs this up. More than half of employees reported they would quit their jobs if their company didn’t allow for flexibility post-pandemic.  

And with many companies listening and responding to what employees want, people know they have options. They have the flexibility to quit their jobs and feel confident that there’s another one — perhaps even a better one — out there for them. 

Upskilling or career transitions 

Let’s go back to my friend Dave. Much like many employees re-examined what they want from their companies, they also re-examined what they want out of their careers. 

For many people, this came down to new skills or completely new careers. Many folks decided it wasn’t too late to start over in life. Others decided they wanted to upskill or reskill — and move their career in a different direction. Some, like my friend Dave, are pivoting industries and fields entirely. 

Caregiving or other career pauses 

I had a friend text me last night. She recently had her second baby. She’s about one month into her maternity leave and her oldest is still a toddler. 

“I just think it’s more important that I stay home with the kids.” 

She decided that she needed to put her career on pause to work full-time as a mom. She hopes to return to the workforce eventually. But she knows now isn’t the time. And with companies like LinkedIn making big inclusive moves, it’s becoming more widely accepted. 

After all, staying at home as a parent is hard work. Parents often return to the workforce with a full portfolio of transferable skills. And hopefully, our society is moving toward being more accepting of those who have pressed pause on their careers. 

The search for purpose and meaning 

This is a biggie. At the heart of all the causes of frictional unemployment, this is a foundational theme. The search for purpose and meaning. 

We’re human beings. We thrive when we’re living with purpose, clarity, and passion. We feel connected to our work and to our goals when we understand the purpose. But without purpose, it’s easy to feel lost and to get sidetracked. It’s easy to start to go through the motions of life. 

But the pandemic jerked our attention to purpose and meaning. Nearly two-thirds of employees reported that COVID-19 caused them to re-examine their purpose. It only makes sense that a big underlying cause of frictional unemployment is rooted in our human pursuit of purpose

frictional-unemployment-man-on-phone

4 impacts of frictional unemployment 

Frictional unemployment comes with an impact, like any other type of unemployment. Here’s what you can expect when frictional unemployment is prevalent in the economy. 

  • Employers can struggle to retain talent. As we’ve seen with the Great Resignation, it can be hard to hold onto your talent.

    For organizations, this means investing in the employee experience is more important than ever. Companies everywhere are trying to meet their employees’ needs. At the end of the day, it’s about keeping your employees happy. 
  • The talent marketplace can become fiercely competitive. Just like it’s easier to keep your talent, it can be harder to capture top talent, too. Right now, candidates are regularly fielding multiple offers.

    In today’s economy, it’s not uncommon for candidates to have the flexibility to weigh their options. For employers, this means that you better put your best foot forward. With a fiercely competitive talent marketplace, your organization has to come out on top to win top talent. 
  • The economy benefits. When frictional unemployment is at its highest, it means the economy is doing well. A healthy economy is a good thing — businesses and people alike reap the benefits. 
  • People have more potential to live with purpose. If people are frictionally unemployed, it’s likely because of that underlying foundational cause: purpose.

    At BetterUp, we’re driven by our mission to help people everywhere live with greater purpose, clarity, and passion. And truly, nothing makes us happier than seeing people live out their purpose. 

Frictional unemployment compared to other types of unemployment

The word “unemployment” tends to have a negative connotation. That’s because frictional unemployment is much different from other types of unemployment. You might be wondering what the differences are between these types of unemployment. Here’s what you need to know. 

Cyclical unemployment 

When you think of recessions, cyclical unemployment is probably what comes to mind. ​​When the economy slows, hiring tends to follow. When companies reduce their hiring or lay off employees, it’s typical cyclical unemployment rises. 

For example, our economy had a short-term bout with cyclical unemployment when the pandemic first hit. We also went through a financial crisis in 2008, where cyclical unemployment hit many families and businesses hard.

Structural unemployment 

Structural unemployment is another type of unemployment. This type of unemployment occurs when there’s a structural change in the economy. 

For example, let’s look at the fossil fuel industry. With the emergence of clean and renewable energy sources, many fossil fuel companies are scaling back. Some are opting for more sustainable energy sources while others are feeling the impacts of layoffs. This is an example of structural unemployment. 

frictional-unemployment-shoes-in-waiting-room

Retain your talent amid frictional unemployment 

So, what can your organization do to retain talent amid frictional unemployment? Here are four things you should keep in mind. 

  • Promote career mobility internally. Employees want to be able to learn and grow. But for many companies, it takes intentionality to promote internal growth.

    Beyond linear career paths, how is your organization promoting career mobility? Are you investing in an internal talent marketplace tool? Are your managers encouraging employees to pursue internal opportunities? 
  • Provide access to coaching. Virtual coaching builds mental fitness. Thriving employees means thriving organizations. Our data shows that mentally fit employees are more productive, more resilient, more satisfied with their jobs, and less likely to leave voluntarily.

    But it starts with a personalized approach to betterment seekers. Invest in coaching and see the transformation it can bring to your workforce. 
  • Re-examine your talent acquisition strategy. Talent is everywhere but oftentimes, many talented people face severe barriers to opportunity. How are you sourcing your talent? Are you meaningfully diversifying your talent pool? Can you partner with workforce development organizations to capture and develop top candidates?

    Your retention strategy should start with talent acquisition. Take a close look at your company’s hiring process. It could very well be the change that makes a lasting difference for your organization. 

In a tight labor market, don’t overlook frictional unemployment 

The labor force is competitive. Economists are reporting low unemployment rates. But that means that the frictional unemployment rate is probably higher. 

Frictional unemployment is a symptom of economic growth. It's a form of unemployment that works for people first, and companies second.

As more and more candidates leave their current jobs in search of a better job, how are you making available jobs attractive? What can make your company stand out in today’s job market? What makes the number of people looking for a new job attracted to your company? 

The right job is personal. There are plenty of personal reasons that define the right job for job seekers. Keep in mind the whole person as you build out your hiring strategy. What working conditions do employees prefer? Is there a mismatch in skills you can remedy? Are the re-entrants to the workforce you can capture?  

BetterUp can help. With access to personalized coaching, you can invest in your people in a meaningful way. After all, every organization wants to see its people thrive. 

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Published April 20, 2022

Madeline Miles

Madeline is a writer, communicator, and storyteller who is passionate about using words to help drive positive change. She holds a bachelor's in English Creative Writing and Communication Studies and lives in Denver, Colorado. In her spare time, she's usually somewhere outside (preferably in the mountains) — and enjoys poetry and fiction.

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