Structural Unemployment
Unemployment that lasts for a long time and is aggravated by external causes.
What is Structural Unemployment?
Structural unemployment is a type of unemployment that lasts for a long time and is aggravated by external causes such as technology, competition, and government policy.
It arises when workers lack the necessary job skills or reside far away from job opportunities and cannot relocate. There are jobs available, but there is a significant mismatch between what employers require and what employees can provide.
The external processes or events that result in fundamental changes in the economy lead to structural unemployment.
Variables outside the business cycle also produce it. The business cycle describes the swings in economic activity that a country's economy goes through all-around time.
Expansions, i.e., times of economic development, and contractions, i.e., periods of economic collapse, make up the economy.
Employment, output, sales, and income rise during expansions, whereas unemployment rises, output slows, sales fall, and incomes remain stagnant or decline during contractions, often known as recessions.
Key Takeaways
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Long-term unemployment caused by economic developments is known as structural unemployment.
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This sort of unemployment occurs when there is a mismatch between what employers require and what available workers can provide.
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It can continue for decades and reversing it usually necessitates a significant change.
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Technology worsens it by marginalizing certain employees and making specific jobs obsolete, such as manufacturing.
How Structural Unemployment Works
If structural unemployment is not addressed, the unemployment rate will rise long after the recession has ended, and so will the natural rate of unemployment, sometimes known as "frictional unemployment."
Natural unemployment is characterized as the lowest rate of unemployment that a given economy may achieve. It's "natural" since it's caused by factors other than the troubles that a lousy economy brings.
Frictional unemployment, for example, is a type of natural unemployment. New graduates just starting their job search, people leaving a job to relocate to another city, or people abandoning their jobs to look for a better one are a few examples.
There will always be some people who are unemployed in such conditions, no matter how strong the economy is. Structural unemployment is a subset of natural unemployment.
Causes of Structural Unemployment
The two most typical economic shifts that cause structural unemployment are
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Technological advancement
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The quick movement of available jobs
Surplus unemployment is another element that contributes to natural unemployment. This happens when a union or minimum wage legislation imposes wage limits. As a result, firms are forced to reduce their personnel to keep within budgetary limits.
These sorts of unemployment will exist even when an economy is operating at full capacity. There is no "fix" for them regarding economics or markets.
This is why most economists believe an economy is at full employment when it hits its natural unemployment rate. According to most economists, the natural unemployment rate is roughly 4%.
Structural Unemployment Real-World Example
Over the last three decades, people have lost thousands of well-paying manufacturing jobs in the United States as production jobs have shifted to lower-cost places like China.
A greater natural rate of unemployment is caused by a decrease in the number of jobs available.
Future structural unemployment will rise as the workers with insufficient skills will be at a disadvantage as technology advances in all sectors of life.
Given the rapid pace of technological obsolescence and the expanding usage of artificial intelligence (AI), even people with talents may suffer redundancy.
It will impact structural unemployment more than the business cycle, which is driven by large employment system mismatches.
The 2008 financial crisis resulted in unprecedented amounts of unemployment. Over 8.7 million jobs were lost to the recession. The unemployment rate climbed to 10.2 percent by October 2009.
A wave of foreclosures stifled housing, which generally drives the expansion phase of the business cycle. As a result, nearly half of the unemployed people had been jobless for six months or more.
Cyclical unemployment gave way to structural unemployment when people's skills and experience became obsolete. The elderly were afflicted the hardest because of it.
Even though younger workers were more likely to be unemployed, this did not last long. They either sought a low-paying job or returned to school, thus dropping out of the workforce.
Though their jobless period was long (19.9 weeks), it was shorter than the elderly unemployed.
What Is Unemployment?
A person who is actively looking for work but is unable to find it is said to be unemployed. A key metric for gauging the state of the economy is unemployment.
The most common measure of unemployment is the unemployment rate, which is determined by the following:
Unemployment Rate = Number of people unemployed / Total number of people seeking employment.
Unemployed people who meet certain conditions are offered unemployment insurance in many countries.
Since it shows whether employees can obtain decent jobs and contribute to the economy's productive output, unemployment is a crucial economic statistic. Moreover, it excludes people who left the workforce for other reasons, such as retirement, further education, or disability.
Total economic output will be lower than it otherwise would be if there are more unemployed workers in the economy.
Unemployed workers must maintain subsistence consumption while they are unemployed. This shows that an economy with a high unemployment level produces less without a corresponding drop in demand for necessary goods and services.
Long-term high unemployment could signal severe economic pressure and spark social and political unrest in an economy.
On the other hand, a low unemployment rate suggests that the economy is more likely to run at or close to its potential and optimize its output which leads to enhancing wage growth and progressively rising living standards of the people.
The maximum rate of production for a business while manufacturing a good or offering a service is referred to as capacity. Management must acknowledge the limitations of the manufacturing process to do capacity planning.
Depending on the type of business, the term "capacity" might refer to a manufacturing process, human resource allocation, technical thresholds, or several other related concepts.
No system can operate efficiently for an extended period; delays and inefficiencies prevent achieving a theoretical output level over time.
On the other hand, exceptionally low unemployment may be a sign of an overheating economy, inflationary pressures, and a competitive labor market for employers.
Types of Unemployment
Economists categorize unemployment into a variety of groups. The two broad classifications are:
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Voluntary - It signifies that a person willingly left work in search of other opportunities.
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Involuntary unemployment - It signifies that someone was fired or laid off and needs to find new employment.
It can further be divided into four categories.
1. Frictional Unemployment
This form of joblessness is usually temporary. From a financial sense, it is also the least difficult one. It occurs when people change their place of employment voluntarily within a given economy as it takes time to find another job if a person leaves a company.
Similar to recent graduates, frictional unemployment results from newly graduated individuals just beginning their jobs. Frictional unemployment is a natural outcome because market processes take time, and knowledge might be pricey.
Finding a new job, hiring new staff, and placing the right people in the proper places need time and effort, which leads to frictional unemployment.
2. Cyclical Unemployment
Cyclical unemployment is the term used to describe the shifts in the unemployment rate that occur during economic ups and downs, a result of situations like changes in oil prices.
Unemployment increases during recessions while decreasing during periods of economic expansion.
One of the main reasons for studying economics and the purpose of the many policy tools that governments use to stimulate the economy on the downside of business cycles is to prevent and alleviate cyclical unemployment during recessions.
3. Structural Unemployment
A technical change in the economy's structure that impacts labor markets leads to structural unemployment.
With technical advancements like the switch from horse-drawn conveyance to vehicles or the automation of production, workers are forced out of employment that are no longer necessary.
Retraining these individuals can be challenging, expensive, and time-consuming. The displaced workers can experience prolonged unemployment or leave the profession altogether.
4. Institutional Unemployment
Institutional unemployment is led by long-term or permanent economic incentives and institutional reasons. The following causes may contribute to institutional unemployment:
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Examples of some government policies are high minimum wage floors, substantial social welfare programs, and tight occupational licensing requirements.
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Efficiency salaries and discriminatory hiring are examples of labor market phenomena.
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High rates of unionization are examples of labor market institutions.
How to Overcome Structural Unemployment
Some policies formulated by the government to overcome structural unemployment are:
1. Education/training
The training programs must focus on skills and qualifications that will allow unemployed people to obtain jobs in new industries.
This might include the government funding training programs for skills that are in high demand. For instance, vocational training in bricklaying, plumbing, electrical work, or nursing.
Because of the 'free-rider dilemma,' businesses in a free market may be unwilling to give enough training. Workers who profit from training programs can subsequently go to work for other companies.
The government can help overcome market failure by paying the full cost or subsidizing training costs for businesses.
Government failure, on the other hand, may have a disadvantage. For example, a government department may be slow to respond to changing market demands, resulting in subsidies for the wrong kind of training programs or the ones that do not require them.
Offering training programs may not always result in a high take-up rate. The unawareness of the benefits may lack the confidence or inclination of the unemployed people to participate in new training programs.
2. Housing subsidies
With regional unemployment, the government may provide housing benefits to assist unemployed people in obtaining jobs in high-demand locations.
However, this might be costly, and determining who needs housing assistance and how long could be difficult. The government might build dwellings in pricey locations as a long-term solution.
3. Employer subsidies
Instead of encouraging workers to relocate, the government should provide incentives for businesses to relocate to economically poor areas.
Many public sector posts, for example, have been shifted from London to places with greater unemployment rates, such as South Wales, Yorkshire, and Scotland.
However, the number of positions that can be relocated to different areas is limited. Employers will be hesitant to relocate from major cities such as New York and London to poor urban or rural areas such as the US's rust belt.
4. Labor market flexibility
Improved labor market flexibility is a priority for free-market economists. Allowing part-time, temporary work, for example, provides greater options for the unemployed to find new jobs.
On the other hand, these positions are more precarious, often pay less, and result in underemployment.
Monetarists such as Milton Friedman think unemployment is primarily a supply-side issue that requires labor market reforms (such as lowering minimum wages and taxes) and a simplified process for businesses to start up.
While free markets have a role to play, according to Joseph Stiglitz, globalization and free trade have often resulted in too many "losers."
Despite increases in real GDP, some people are left behind due to the fast rate of economic change and a lack of support for former manufacturing workers who are now chronically unemployed.
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