What is Structural Unemployment? Examples and Causes

After a recession is over, structural unemployment can keep the unemployment rate high for a long time. If this unemployment is being ignored, it can bring about a higher natural unemployment rate. The sum of frictional and structural unemployment is thought of as the Natural Unemployment Rate. Structural unemployment is the result of a skill mismatch between jobs available and the skillsets of the workers.

Binding minimum wages cause structural unemployment but as long as the marginal productivity is greater than the marginal productivity, it will not affect the overall unemployment. When there is structural unemployment, the real wage is sometimes rigid.

Although structural unemployment is usually temporary, it is a significant economic problem because its effects are long-lasting as well as the challenges that have to do with overcoming the issue. As earlier pointed out, it brings about an increase in the natural unemployment rate.

However, this does not always indicate the presence of a recession in an economy because it can come about during economic growth. Structural unemployment is frequently caused by a mismatch between the skills of the unemployed and the jobs available. ceteris paribus, if structural unemployment increases, the economy is not fully employed.

Unlike cyclical unemployment, structural unemployment is the result of forces other than the business cycle. It is more difficult to be corrected than other types of unemployment. This is because while jobs can be added, they are typically low quality. Also, this type of unemployment affects older people more than it does their younger counterparts. Structural unemployment is a form of supply-side unemployment rather than insufficient aggregate demand, and it is involuntary and long-lasting.

Structural unemployment definition in economics

Structural unemployment is best described as unemployment arising from a mismatch between the skill sets of the unemployed population and the jobs available. That is, businesses or employers may require some sets of skills from the unemployed that they do not possess. This will keep them unemployed for a long period of time and can bring about further unemployment as they may not be employable. In essence, structural unemployment is often caused by the lack of correlation between the skills of laborers and the job opportunities available.

Therefore, structural unemployment consists of people who are unemployed because of the fact that they do not have the skills to fit into the jobs available to them. With this, the government can assist in reducing the level of structural unemployment by providing housing and relocation subsidies as well as other measures that will be discussed in the latter part of this article.

We can see that in relation to technological changes, structural unemployment occurs when the skills of laborers no longer fit into the jobs available especially when most of the jobs are being automated. Structural unemployment is likely to be affected by technology, competition, and government policy.

Structural unemployment causes

1. Technological changes/advancements
2. Competition
3. Geographical immobility
4. Macro-economic changes
5. Wage related causes
6. Lack of internal training or education programs
7. Company relocations
8. Occupational immobilities

The above mentioned are the causes of structural unemployment. It is certain that the root cause of structural unemployment is the mismatch that exists between the skills of the unemployed and the jobs available for them. At large, the economy is functional, meaning that jobs are more available in the economy than the people doing the jobs. However, abundant labor exists but there are no jobs in some areas, whereas in other areas, plenty of jobs are available but the laborers are few. Let us look at each of the causes of structural unemployment listed above.

Technological changes/advancements

Structural unemployment occurs as a result of technological changes. Advancements in technology have significant effects on the economy. When new technologies are being introduced, this can cause some of the jobs that exist to become obsolete thereby leaving many individuals unemployed. Also, new technologies can bring about a substantial increase in productivity which allows companies to reduce their labor force without it having a negative effect on their overall output. In this situation, many workers lose their jobs and from there, structural unemployment arises.

In other words, new technologies give room for companies to automate their systems, thereby increasing efficiency and retiring previous methods of production. However, it can also cause certain jobs to become redundant. Because of this, technology has a significant impact on this form of unemployment across industries, especially in manufacturing, agriculture, and trade markets.

Competition

Competition is another factor that can bring about structural unemployment in an economy. An instance is that globalization is one of the vehicles that drive an increase in competition all over the world. Generally, developing countries provide cheap labor, and many firms from developed countries move their manufacturing facilities to developing countries. As a result of this, previously involved workers in manufacturing facilities then become unemployed.

Geographical immobilities

Structural unemployment can result from geographical immobilities. Geographical immobilities occur when workers are not able to move from places with a high unemployment rate to places that are short of labor. One reason can be that the laborer is experiencing difficulties in buying or renting a house. In many cases, there are places where the skills of the laborer match the job available but these places are geographically far from the worker’s region, and the workers are either not ready or willing to relocate to such places.

In some cases, geographical immobility is not the direct cause of structural unemployment, however, it can worsen its effects. An instance is a case whereby a population in a region with high unemployment is unwilling to relocate to regions where there are abundant jobs. In this case, high unemployment will continue.

Macro-economic changes

Structural unemployment occurs because of macroeconomic changes. Older workers face these issues. In this case, they have worked with perfection in a certain skill but the jobs related to that particular skill suddenly are nowhere to be found and their skills have become obsolete.

Wage related causes

Another cause of structural unemployment is the fact that workers do not accept the job because the package being offered is very less. The reason behind such low packages is usually an abundance of labor which is easily available at a cheaper rate.

Lack of internal training or education programs

It is necessary for businesses to make provisions for employees with training programs ad certification courses in order to enhance their sets of skills. When businesses fail to do this, it can bring about structural unemployment. This is so because employees lack the skills needed to adapt to new technologies or business practices.

Company relocations

The relocation of companies is another factor that can bring about structural unemployment. In this case, businesses relocate to other regions. Being dependent upon local job opportunities, previous employees may be unable to find similar jobs that require their skills or knowledge.

Occupational immobilities

Structural unemployment is caused by occupational immobilities. This occurs after economic changes bring about a shift in demand for skilled labor. For example, the closure of manufacturing firms may cause workers with the required skills to face difficulties relocating to new industries where a different set of skills are required. It takes time for people to undergo retraining and older workers may have a feeling that it is too difficult.

Structural unemployment examples

The following will explain the examples of structural unemployment;

Take a plant where clothes are being manufactured, for instance, the product assembly workers become structurally unemployed after specialized production assembly equipment was invented. Some employees receive the tasks of monitoring and calibrating equipment but the rest are left to decide whether to pursue education or explore a different industry.

Another example of structural unemployment is the free trade laws that give room for global farming businesses to enter a new market. Because of their size, they can offer food items to retailers and manufacturers at lower prices. With this, a regional farming operation becomes unable to maintain business because their partners can obtain more products for less money with global corporations. Farm employees, therefore, become structurally unemployed as a result of their farm closing as well as additional farm closures in the area.

We can also look at digital reading formats as an example of one of the causes of structural unemployment. As a result of the increase in the use of digital reading formats such as e-books and websites, the need for the same amount of print copies for books and magazines reduces. This then causes printing press and paper mills to start shutting down their operations. With this, employees become structurally unemployed as fewer work opportunities where they can apply their skills exist.

Another example of structural unemployment is when a steel rolling company relocated from a particular region where their business will flourish more. This caused many workers to lose their jobs as they are unable to relocate to the new region as a result of distance, causing them to be structurally unemployed. In this case, both geographical barriers and relocation brought about unemployment for the laborers.

Another case study example is when grocery stores begin to install self-checkout stations where there was no need for customers to rely on a cashier. As a result of this, the number of cashier jobs available reduced as supermarkets begin adapting to the use of self-checkout machines. The remaining cashiers offer assistance to customers with large purchases while two or more employees monitor the self-checkout area to assist customers as needed. As a result of this automation, some cashiers lost their jobs.

Effects of Structural Unemployment

1. Inefficiency
2. Support costs
3. Instability
4. Crime
5. Hysteresis
6. A decline in the participation rate

Inefficiency

One effect of structural unemployment is the problem of inefficiency factor. When there is no work available for the huge percentage of workers, it is an indication that a high amount of workforce that can be used for the production is going unused. Here, only efficient economies can make use of the workforce to its maximum.

Support costs

Another cost of structural unemployment is the cost that a country has to incur while supporting the unemployed workers at a given point in time. Although some countries spend nothing on supporting the unemployed, there are countries that make provision for benefits in cash or in kind for the unemployed workforce.

Instability

Structural unemployment brings about an increase in instability in the country. Although modern economies consider structural unemployment at a lower level to be necessary, unrest can surface in an economy when it reaches its peak. Every job seeker desires employment to earn money but if they fail to get the job, they may bring about violence or probably push the government to get changed.

Crime

Obviously, there is a strong correlation between unemployment and crime. In the need of money, people begin to indulge in social vices such as robbery in order to meet their living expenses. Crime brings about an increase in an area’s instability which results in spending money on security instead of spending the same money on the production of goods and services.

Hysteresis

This refers to the idea that unemployment rates can bring about a rise in future unemployment rates. When workers are unemployed for a very long time, they become less employable even if they obtain new qualifications.

A decline in the participation rate

During periods of high structural unemployment, participation rates can fall drastically. Workers experience demotivation, and discouragements, and are more likely to suffer health challenges. Therefore, they may give up on the labor market and retire early or be regarded as being sick for a long time. Here, these former workers are no more regarded as unemployed but as a loss to the labor market. Moreso, they have a high tendency of becoming net recipients of government aid such as healthcare and welfare and benefits.

Solutions to Structural Unemployment

1. Education and training
2. Breaking geographical barriers
3. Housing subsidies
4. Decrease or removal of unemployment benefits
5. Employer subsidies
6. Labor market flexibility

Structural unemployment will decrease when the above measures are taken.

Education and training

In order to curb structural unemployment, states can take the responsibility of recognizing the changes that are necessary for the economy. With this, they may organize training programs to provide training for the workforce and give them updates with regard to technological changes as well as other changes.

Some workers may not be able to afford training programs. Because of this, it will be good for governments to try making provisions for such training programs free of charge.

Also, it is critical for them to facilitate job placements after the training programs have been completed. With this, the unemployed will increase their skills for finding a job in a new industry. In this case, the best solution to the problem of structural unemployment is the training of unemployed individuals.

There is a need for these training programs to focus on skills and qualifications that will give room for the unemployed to obtain jobs in new industries.

In a free-market economy, firms may not be willing to make provision for sufficient training because of the “free-rider problem”. The thought is that workers may go and work for other firms and businesses if they gain benefits from training schemes.

In order to overcome this market failure, the government can step in or subsidize firms. However, a drawback of government failure may exist. An instance is where the government is slow in responding to the changes in market preferences as well as subsidizing the wrong training schemes, or those not necessarily needed by the employers. Another problem is that making provisions for training schemes may not necessarily possess a high take-up rate.

The unemployed population may not have the confidence or willingness to take on new training schemes because they are not sure of their benefits.

Breaking geographical barriers

Structural unemployment includes the fact that the population cannot relocate to locations where the skills they possess are needed by employers. The development of information technology has made it easier to break geographical barriers. This makes it easier for employees to work from distant locations with the set of skills that they possess. Also, the government can subsidize the relocation of unemployed individuals from locations with high structural unemployment to other locations. These measures help in breaking geographical barriers. The government can also offer to incentivize companies to create job opportunities in regions that are depressed.

Housing subsidies

The government can provide housing subsidies and benefits to help unemployed individuals to find jobs in expensive areas that have high employment. However, this can be expensive, and evaluating who is in need of housing benefits and the length of time may be difficult. A long-term solution could probably be that the government builds housing in expensive areas.

Decrease or removal of unemployment benefits

The government can decide to remove unemployment benefits in order to give the unemployed incentives to look for a job as soon as possible. However, this may increase the cost of living for unemployed individuals. Unemployment insurance contributes to structural unemployment by disincentivizing the unemployed from searching for jobs as some may be comfortable with their status.

Employer subsidies

Another way in which the government can curb structural unemployment is to incentivize firms to relocate to depressed areas, rather than encouraging workers to move. However, there is a limit to the number of jobs that can be relocated to other regions. This is because in some cases, firms/employers will be reluctant to relocate from their current cities as they desire to remain in areas where their businesses will flourish.

Labor market flexibility

Another way to reduce structural unemployment is the flexibility of the labor market such as allowing part-time, and temporary work, which allows the unemployed to have more opportunities as well as gain new opportunities. However, these jobs can be more insecure and usually offer lower pay thereby leading to a form of underemployment.

How to calculate the structural unemployment rate

The structural unemployment rate refers to the proportion or percentage of the total labor force that is involuntarily unemployed as a result of a mismatch of skills, government policies, competition of businesses, or technological changes. How to find structural unemployment rate; First, the figures of the structurally unemployed workers are obtainable from the Bureau of Labor Statistics or the National Statistics Agency. The sum of frictional and structural unemployment is the natural rate of unemployment (NRU) which is in existence when the economy produces full employment real output.

Structural unemployment rate formula

The structural unemployment formula can be represented as;

Structural unemployment rate = Number of structurally employed workers / Total labor force x 100

Graph

The labor demand curve slopes down which imply that as wage falls, firms will be willing to hire more employees to work for them. On the other hand, firms are unwilling to hire more employees when wages are high. This is a result of diminishing marginal labor. Keeping capital constant, as firms add more workers, they become less productive. On the other hand, the labor supply curve slopes upward which implies that more workers are willing to work at higher wages.

The interrelationship between demand and supply is the determinant of the prevailing wage in the market as well as the number of people hired. If at a certain level of wage, the number of workers that firms need is higher than the number of workers that are willing to work, there will be a rise in the market wage thereby bringing about an increase in the number of workers that are willing to work. This will bring about a decrease in the number of workers that firms would want to hire.

If at a certain level of wage, the number of workers that are willing to work exceeds the number of workers that firms need, the market wage will fall thereby bringing about a decrease in the number of workers that are willing to work. Furthermore, the number of jobs available will increase. Now, let us look at the structural unemployment diagram.

The diagram is a better explanation of the wage-related causes of structural unemployment as stated above.

Frictional vs structural unemployment

Both frictional and structural unemployment are two different types of unemployment that take place in an economy. Frictional unemployment has to do with individuals transitioning from one job to another and it does not have anything to do with the economic cycle. Structural unemployment, on the other hand, is the direct outcome of economic shifts such as technological changes.

While frictional unemployment is voluntary, structural unemployment is not voluntary. Frictional unemployment results from workers searching for a new job or transitioning from old to new jobs while structural unemployment is the result of a mismatch between the skills of the unemployed and the jobs available.

FAQs

Last Updated on November 6, 2023 by Nansel Nanzip Bongdap