Structural Unemployment

Structural Unemployment Definition

Structural unemployment occurs when changes in the economy or technological advancements create a mismatch between the skills workers possess and the skills employers require. As a result, even when jobs are available, individuals might be unable to secure employment due to the gap between their qualifications and the job market demands.

Unlike other types of unemployment, such as frictional, structural unemployment is much more persistent and lasts for more extended periods. This type of unemployment has long-term economic consequences and can result from different factors.

Causes of Structural Unemployment

Structural unemployment arises when the skills of the workforce do not match the requirements of the job market. Understanding the causes of structural unemployment is essential for developing effective strategies to address the issue.

Technological advancements and increased productivity

Technological advancements can cause structural unemployment when new technologies make certain jobs or skills obsolete, as well as when they significantly increase productivity. For example, the introduction of self-checkout machines in grocery stores has reduced the demand for cashiers, while automation in manufacturing has allowed companies to produce more goods with fewer workers.

Fundamental changes in consumer preferences

Fundamental shifts in consumer preferences can lead to structural unemployment by making some industries less relevant and creating demand for new ones. For instance, the rise of digital media has led to a decline in the demand for printed newspapers and magazines, resulting in job losses in the print industry while creating new opportunities in online content creation and digital marketing.

Globalization and competition

Competition and globalization can contribute to structural unemployment as industries move to countries with lower labor costs or better access to resources. A classic example is the offshoring of manufacturing jobs from the United States to countries like China or Mexico, leaving many American workers without employment opportunities in their skillset.

Education and skill mismatches

A lack of relevant education and training can lead to structural unemployment when the workforce is not equipped with the necessary skills to meet the demands of the job market. For example, a country experiencing a boom in the technology sector may face a shortage of qualified professionals if its education system does not adequately prepare students for careers in technology.

In conclusion, the causes of structural unemployment are diverse and interconnected, ranging from technological advancements and increased productivity to fundamental changes in consumer preferences, globalization, and education and skill mismatches. Addressing these causes requires a multifaceted approach that includes education reform, retraining programs, and policies that encourage innovation and adaptability in the workforce.

Structural Unemployment Graph

Figure 1 shows the structural unemployment diagram using demand and supply for labor analysis.

Fig. 1 - Structural unemployment

The labor demand curve slopes downward, as indicated in Figure 1. above. It implies that when wages decline, businesses are more inclined to recruit new employees and vice versa. The labor supply curve is an upward sloping curve that indicates that more employees are willing to work when the pay increases.

The equilibrium occurs initially when the demand for labor and supply for labor intersect. In Figure 1., at the point of equilibrium, 300 workers are getting paid a $7 per hour wage. At this point, there is no unemployment as the number of jobs is equal to the number of people who were willing to work at this wage rate.

Now assume that the government decides to put a minimum wage of $10 per hour. At this wage rate, you will have many more people willing to supply their labor which will cause a movement along the supply curve, resulting in an increase in the quantity of labour supplied to 400. On the other hand, when companies have to pay $10 an hour to their workers, the quantity demanded will drop to 200. This will cause a surplus of labor = 200 (400-200), meaning more people are looking for jobs than there are job openings. All these additional people that can't be employed are now part of the structural unemployment.

Structural Unemployment Examples

Structural unemployment occurs when there is a mismatch between the skills of available workers and the requirements of available jobs. Examining examples of structural unemployment can help us better understand its causes and consequences.

Job losses due to automation

The rise of automation has led to significant job losses in certain industries, such as manufacturing. For example, the adoption of robots and automated machinery in car manufacturing plants has reduced the need for assembly line workers, leaving many of them unemployed and struggling to find jobs that match their skill set.

Decline in the coal industry

The decline in the coal industry, driven by increased environmental regulations and the shift towards cleaner energy sources, has resulted in structural unemployment for many coal miners. As the demand for coal decreases and mines close, these workers often face difficulty finding new employment in their region, especially if their skills are not transferable to other industries.

Political change - the collapse of the Soviet Union

The collapse of the Soviet Union in 1991 led to significant political and economic changes, which resulted in structural unemployment for many workers in the region. As state-owned enterprises were privatized and centrally planned economies transitioned to market-based systems, numerous workers found their skills no longer in demand, forcing them to search for new employment opportunities.

In summary, structural unemployment examples like job losses due to automation and the decline in the coal industry demonstrate how technological changes, consumer preferences, and regulations can lead to a skills mismatch in the labor market.

Disadvantages of Structural Unemployment

There are many disadvantages of structural unemployment. Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing to work, but they cannot do so as they lack the necessary skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

Another disadvantage of structural unemployment is increased government spending on unemployment benefits programs. The government will have to spend more of its budget supporting those individuals who became structurally unemployed. This means that the government would have to use a large part of its budget on unemployment benefits programs. To fund this increased spending the government could potentially raise taxes which would create other consequences such as a decrease in consumer spending.

Cyclical vs Structural Unemployment

Cyclical and structural unemployment are two distinct types of unemployment that occur due to different reasons. While both result in job losses and affect the overall economy, it is essential to understand their unique causes, characteristics, and potential solutions. This comparison of cyclical vs structural unemployment will help clarify these differences and provide insight into how they impact the labor market.

Cyclical unemployment is primarily caused by fluctuations in the business cycle, such as recessions and economic downturns. When the economy slows down, demand for goods and services decreases, leading businesses to cut back on production and, subsequently, on their workforce. As the economy recovers and demand picks up, cyclical unemployment typically decreases, and those who lost their jobs during the downturn are more likely to find new employment opportunities.

On the other hand, structural unemployment arises from a mismatch between the skills possessed by available workers and the skills required for available jobs. This type of unemployment is often the result of long-term changes in the economy, such as technological advancements, shifts in consumer preferences, or globalization. Addressing structural unemployment requires targeted policies and initiatives, such as retraining programs and educational investments, to help workers acquire the necessary skills for new job opportunities.

Key differences between cyclical and structural unemployment include:

• Causes: Cyclical unemployment is driven by changes in the business cycle, while structural unemployment results from a skills mismatch in the labor market.
• Duration: Cyclical unemployment is typically temporary, as it decreases when the economy recovers. Structural unemployment, however, can persist for extended periods due to long-term economic changes.
• Solutions: Policies aimed at stimulating economic growth can help reduce cyclical unemployment, whereas structural unemployment requires targeted initiatives like retraining programs and educational investments to bridge the skills gap.

Frictional vs Structural Unemployment

Let's compare structural unemployment to another type of unemployment - frictional unemployment.

Frictional unemployment occurs when individuals are temporarily between jobs, such as when they are searching for a new job, transitioning to a new career, or have recently entered the labor market. It is a natural part of a dynamic economy, where workers move between jobs and industries to find the best match for their skills and interests. Frictional unemployment is generally considered a positive aspect of the labor market because it signifies the availability of job opportunities and workers' ability to change jobs in response to personal preferences or better prospects.

In contrast, structural unemployment is the result of a mismatch between the skills held by available workers and those required for available jobs. This type of unemployment is often due to long-term changes in the economy, such as technological advancements, shifts in consumer preferences, or globalization.

Key differences between frictional and structural unemployment include:

• Causes: Frictional unemployment is a natural part of the labor market, arising from workers transitioning between jobs, while structural unemployment results from a skills mismatch in the labor market.
• Duration: Frictional unemployment is typically short-term, as workers find new jobs relatively quickly. Structural unemployment, however, can persist for longer periods due to more profound economic changes.
• Solutions: Improving job search tools and labor market information can help reduce frictional unemployment, whereas structural unemployment requires targeted initiatives like retraining programs and educational investments to bridge the skills gap.

Theory of Structural Unemployment

The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills. This type of unemployment is harder for governments to fix as it would require a large portion of the labor market to be retrained. The theory of structural unemployment further suggests that this type of unemployment is likely to emerge when there are new technological advances.