Structural unemployment

Structural unemployment occurs as a result of the changing structure of an economy over time, and is defined as the unemployment resulting from a persistent mismatch between the demand for, and supply of, labour.

Although not the result of a lack of total demand, structural unemployment exists because the current ‘effective’ demand for labour is not satisfied by the current ‘effective’ supply of labour. Structural unemployment is regarded as a significant economic problem as it indicates the extent of unused labour.

The causes of structural unemployment

There are several causes of structural unemployment, including:

Changes in the pattern of demand

As incomes rise over time certain goods and services become more popular while others become less popular. Goods and services with a relatively high and positive income elasticity of demand experience increasing demand, whereas good with low and negative income elasticity of demand do not see growth, or ay even experience falling sales. Over time, these turn into declining industries.

From a macroeconomic perspective this creates a mismatch between the skills required in the emerging industries and those currently existing. Those who do not retrain or upgrade their skills may not be employable in the growth industries. Even if they do retrain this process takes time, and individuals may be structurally unemployed for an extended period of time.

Technological change

Developments in technology may force firms to substitute labour with capital. Firms look to recruit those with the skills needed to use new technology. In addition, new technology encourages the emergence of new firms who can exploit the opportunities that this new technology brings.

For example, the internet has dramatically changed how most firms operate, and the type of labour they recruit -creating new employment prospects for some, and reduced opportunities for others. The travel industry is a clear example of this, where online travel bookings now dominating the industry.

Rigidities in the labour market

Labour markets are not always flexible enough to help match the supply of labour to the demand. Barriers to entry into the labour market including unionisation, discrimination and excessive regulation, may deter entry into the market and restrict the ability of newly emerging industries to recruit the staff they need.

Globalisation

Globalisation and the opening up of economies to free trade has increased international trade and encouraged the exploitation of local comparative advantage.

The rise of China and India as manufacturing nations has meant that many jobs in western economies have been ‘exported’ to them, including jobs in light engineering, pharmaceuticals, and textile production.

Inefficiencies in the provision of education or training

Structural unemployment may worsen when education and training do not function efficiently. The quality of human capital is a key determinant of productivity and employability, but formal education may be unresponsive to the changing needs of the labour market.

Structural unemployment means that while job vacancies exist a lack of skills and the ‘education gap’ may explain why they are not easily filled. The ‘education and skills gap’ is likely to have a particularly large impact on youth employment, with younger workers joining the labour market with insufficient skills. The same is true with ‘re-employment’ after a recession or downturn.

Geographical immobility

Labour immobility is a significant element in structural unemployment. Structural change frequently has a regional dimension with declining industries existing in different regions than emerging and developing industries. The decline in the UK’s manufacturing base from the 1970s affected the north while the growing service sector was located in the south east.

Labour immobility

Possible remedies

The choice of policy will take into account the causes of structural unemployment, the cost of policy implementation, and the likelihood of its success.

Encouraging greater mobility

Mobility can be increased in two basic ways – encouraging workers to move to where they are required, and to provide incentives for firms to relocate to where there is surplus labour. This can be achieved through a combination of subsidies, grants and tax breaks.

Improvements in education and training

  1. Given than education and training are merit goods it is unlikely that the free market will allocate sufficient resources toward them. Government may introduce a range of measures, including:
  2. Setting appropriate standards in terms of literacy, numeracy and IT skills.
  3. Subsidising the provision of education and training – targeted to where it is most needed, including the under 25s and the over-45s.
  4. Increasing the school leaving age.
  5. Encouraging and subsidising apprenticeship schemes.

Providing better information

Government can make better use of the internet to facilitate the flow of information between firms and potential employees.

Reform of tax and benefits system

The tax and benefits system may need to be reformed to create incentives to participate in the labour market. Employment taxes are a cost to firms and lower taxes reduce the cost of labour and may lead to an increase in demand for labour. On the other hand, welfare benefits reduce the cost of leisure and may encourage some to choose leisure over work.


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