One reason for unemployment is that it takes time to match workers and jobs. The equilibrium model of the aggregate labor market discussed in Chapter 3 assumes that all workers and all jobs are identical and, therefore, that all workers are equally well suited to all jobs. If this were true and the labor market were in equilibrium, then a job loss would not cause unemployment: a laid-off worker would immediately find a new job at the market wage.

In fact, workers have different preferences and abilities, and jobs have different attributes. Furthermore, the flow of information about job candidates and job vacancies is imperfect, and the geographic mobility of workers is not instantaneous. For all these reasons, searching for an appropriate job takes time and effort, and this tends to reduce the rate of job finding. Indeed, because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive. The unemployment caused by the time it takes workers to search for a job is called frictional unemployment.

Some frictional unemployment is inevitable in a changing economy. For many reasons, the types of goods that firms and households demand vary over time. As the demand for goods shifts, so does the demand for the labor that produces those goods. The invention of the personal computer, for example, reduced the demand for typewriters and the demand for labor by typewriter manufacturers. At the same time, it increased the demand for labor in the electronics industry. Similarly, because different regions produce different goods, the demand for labor may be rising in one part of the country and falling in another. An increase in the price of oil may cause the demand for labor to rise in oil-producing states such as Texas, but because expensive oil means expensive gasoline, it makes driving less attractive and may decrease the demand for labor in auto-producing states such as Michigan. Economists call a change in the composition of demand among industries or regions a sectoral shift. Because sectoral shifts are always occurring, and because it takes time for workers to change sectors, there is always frictional unemployment.

Sectoral shifts are not the only cause of job separation and frictional unemployment. In addition, workers find themselves unexpectedly out of work when their firms fail, when their job performance is deemed unacceptable, or when their particular skills are no longer needed. Workers also may quit their jobs to change careers or to move to different parts of the country. Regardless of the cause of the job separation, it will take time and effort for the worker to find a new job. As long as the supply and demand for labor among firms is changing, frictional unemployment is unavoidable.

188

Many public policies seek to decrease the natural rate of unemployment by reducing frictional unemployment. Government employment agencies disseminate information about job vacancies to match jobs and workers more efficiently. Publicly funded retraining programs are designed to ease the transition of workers from declining to growing industries. If these programs succeed at increasing the rate of job finding, they decrease the natural rate of unemployment.

Other government programs inadvertently increase the amount of frictional unemployment. One of these is unemployment insurance. Under this program, unemployed workers can collect a fraction of their wages for a certain period after losing their jobs. Although the precise terms of the program differ from year to year and from state to state, a typical worker covered by unemployment insurance in the United States receives 50 percent of her former wages for 26 weeks. In many European countries, unemployment-insurance programs are significantly more generous.

By softening the economic hardship of unemployment, unemployment insurance increases the amount of frictional unemployment and raises the natural rate. The unemployed who receive unemployment-insurance benefits are less pressed to search for new employment and are more likely to turn down unattractive job offers. Both of these changes in behavior reduce the rate of job finding. In addition, because workers know that their incomes are partially protected by unemployment insurance, they are less likely to seek jobs with stable employment prospects and are less likely to bargain for guarantees of job security. These behavioral changes raise the rate of job separation.

That unemployment insurance raises the natural rate of unemployment does not necessarily imply that the policy is ill advised. The program has the benefit of reducing workers’ uncertainty about their incomes. Moreover, inducing workers to reject unattractive job offers may lead to better matches between workers and jobs. Evaluating the costs and benefits of different systems of unemployment insurance is a difficult task that continues to be a topic of much research.

Economists often propose reforms to the unemployment-insurance system that would reduce the amount of unemployment. One common proposal is to require a firm that lays off a worker to bear the full cost of that worker’s unemployment benefits. Such a system is called 100 percent experience rated, because the rate that each firm pays into the unemployment-insurance system fully reflects the unemployment experience of its own workers. Most current programs are partially experience rated. Under this system, when a firm lays off a worker, it is charged for only part of the worker’s unemployment benefits; the remainder comes from the program’s general revenue. Because a firm pays only a fraction of the cost of the unemployment it causes, it has an incentive to lay off workers when its demand for labor is temporarily low. By reducing that incentive, the proposed reform may reduce the prevalence of temporary layoffs.

189