Unemployment is the macroeconomic problem that affects people most severely and directly. For most people, the loss of a job means a reduced living standard and psychological distress. It is no surprise that unemployment is a frequent topic of political debate and that politicians often claim that their proposed policies would help create jobs. One reason for unemployment is that it takes time to match workers and jobs. The equilibrium model of the aggregate labor market assumes that all workers and all jobs are identical and, therefore, that all workers are equally well suited for 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.
Furthermore, the flow of information about job vacancies and job candidates 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 had caused by the time it takes workers to search for a new 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 makes driving less attractive, it 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.
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