Understanding Labour Market Frictions

Labour market frictions significantly impact job creation, particularly for skilled positions, leading to challenges in hiring college graduates. These frictions result in a mismatch, where graduates may remain unemployed despite being overqualified for available roles, temporarily lowering their unemployment rates. If frictions were the sole factor, data would show higher unemployment rates for college graduates in markets with a high wage premium, indicating that while they earn well when matched with suitable jobs, these frictions hinder their job search, resulting in increased unemployment.