7. Answer all parts (a) – (c)

Explain the difference between frictional and structuralunemployment. In the context of search theory explain why a certainamount of frictional unemployment is probably necessary in awell-functioning economy.  

                        Frictional and structural unemployment are two different types ofunemployment that occur in an economy. Frictional unemployment isnot a direct result of economic factors and occurs when workerssearch for jobs. Conversely, structural unemployment is caused byshifts in the economy that make it difficult for workers to findemployment.1

KEYTAKEAWAYS

• Frictional unemployment involves people transitioning betweenjobs; it has nothing to do with the economic cycle and isvoluntary.
• Structural unemployment is a direct result of shifts in theeconomy, including changes in technology or declines in anindustry.
• Frictional unemployment is typically a temporary phenomenon,while structural unemployment can last for years.
• Structural unemployment is very concerning to economists, whilefrictional unemployment is considered inevitable and not factoredinto the unemployment rate.

FrictionalUnemployment

Frictional unemploymentis the result of workers searching for new employment ortransitioning from their old jobs to new ones. It can also bereferred to as “natural unemployment,” because it is not directlyrelated to factors that lead to an underperformingeconomy.2

Frictional unemploymentis voluntary and a direct result of temporary transitions inemployment. This includes new people who are entering theworkforce, anyone who moves to find work in a different city, andpeople who quit their jobs to find other work. Workers may alsochoose to remain unemployed rather than take the first job they areoffered. Thus, frictional unemployment is usually present in aneconomic system, because some people are always searching for newjobs.3

Recent college graduateswho are looking for work may not expect to find a job within a yearof graduating due to their lack of experience. However, offers maycome in for jobs that are not in their chosen field. When theyreject those offers for that reason, they are frictionallyunemployed. Employers can also cause frictional unemployment. Forinstance, employers may feel as though there are not enoughqualified candidates for certain positions and thus not try to fillthem.

Many economists remainunconcerned about frictional unemployment, as there is no way tostop it from happening. They realize that frictional unemploymentis temporary and does not put a strain on government resources suchas social assistance and unemployment benefits. It is actually agood sign for the economy, as it demonstrates that people arelooking for higher-paying, better-quality jobs. Because frictionalunemployment is not directly related to the economy, economiststend to factor it out when calculating the unemploymentrate

StructuralUnemployment

Structural unemploymentis a type of long-term unemployment caused by shifts in theeconomy. It occurs when there is an oversupply of jobs and peoplewho are willing to work them, but those people are not qualified todo so.1

One of the reasonsbehind structural unemployment is technological advances, which cancause some types of skilled laborers to become obsolete. Assume adata analyst at an investment bank has been working in the fieldfor more than 20 years but has never kept up with technologicaladvances and never learned to program. The analyst’s job is easilyprogrammable, and those programs can analyze big data faster. Asthe worker is not qualified for other data-analyst jobs, whichrequire extensive programming skills, he or she experiencesstructural unemployment.

Structural unemploymentcan also be caused by a decline in an industry. Assume the pricesof crude oil have been on the decline over the past year.Therefore, shale oil drilling companies have also been on thedecline, losing money on their total investments due to theweakened oil industry. To combat operating at a loss, the shale oildrilling companies must lay off many of their workers. The skilledworkers in the drilling field do not have the skills to performother jobs in emerging industries and markets. Consequently, thedecline in this industry can lead to structuralunemployment.

Because structuralunemployment is a direct result of the economic cycle, economistsand analysts take it very seriously. If not addressed, this type ofunemployment can last for years, even decades, increasing anation’s unemployment rate.