Structural Unemployment – Definition, Causes and Cure

In the previous article, we studied about frictional unemployment. We understood as to why frictional unemployment is a temporary situation caused by the workers own wishes. It is not a social evil and therefore should not be categorized as such. In this article, we will have a look at the second type of unemployment. This one is called “structural unemployment”. It is a moderately serious situation as compared to frictional unemployment. The details of the same are in the article below:

Definition of Structural Unemployment

Investopedia defines structural unemployment as follows:

“A longer-lasting form of unemployment caused by fundamental shifts in an economy

In Structural Unemployment although jobs are available, there is a serious mismatch between what companies need and what workers can offer. Structural unemployment is exacerbated by extraneous factors such as technology, competition and government policy”

The important points in this definition have been highlighted and will be discussed in detail in this article.

Examples:

However, first to get a better grasp of the concept of structural unemployment, let’s have a look at some of the examples:

• Industry Shifts: Mr A was an expert in manufacturing. He had been managing the shop floor from the age of 18 and is extremely skilled at doing so. However, given the new economy, more and more manufacturing jobs are moving out of the US to China. Mr A’s current employer has asked him to leave with a severance package. At the present moment, Mr A is unable to find jobs that match his skill set. He is however being offered the job of a sales manager with a much lesser pay scale and designation.

• Technology Obsolescence: Ms B has spent her life working on writing algorithms in a particular computer language. However, technology being a fast moving field, that language is now obsolete and hence so is Ms. B. Her current employer XYZ Technologies limited has asked her to leave. She is being offered new jobs. However, most of them pertain to training as she has excellent soft skills. The job of an information technology expert that she enjoyed so thoroughly is nowhere to be found.

• Seasonal Unemployment: Worker C does manual labor in an orange field. For many years he has only been employed for 4 months in a year. During the rest of the year, he manages to earn his subsistence by working as a security guard at a commercial complex in a nearby town.

Duration:

The duration of structural unemployment is considered to be medium term. Structural unemployment usually takes a year or two or maybe slightly longer to resolve itself. This is in contrast with the few weeks that were the adjustment period for frictional unemployment.

The exact time to learn the new skill and find a fitting employment can depend on a multitude of factors. These factors include the age of the worker, the willingness to learn the new skill, complexity of the new skill and availability of cheap and efficient training. Historical precedent, however shows that the problem resolves itself over the medium term.

Involuntary:

The sad part about structural unemployment is that it is an involuntary condition. Mr A, Ms B and worker C were all asked by their employers to leave. They did not quit their job voluntarily. Hence, there is likelihood that these workers will not have the necessary resources to survive this downturn. Couple this with the fact that the situation will not resolve itself for a year or two and the government has a serious situation on hand. The provision of welfare programs by the government has been created for these types of workers. However, most find it difficult to sustain at that meager pay scale.

Root Cause of Structural Unemployment

The root cause of structural unemployment is the skills mismatch. The economy as a whole is functional. This means that there are still more jobs in the economy than there are people to do the jobs. However, in some areas of the economy, there is abundant labor and no jobs whereas in other areas there are plenty of jobs and fewer laborers. The causes of this skills mismatch can be many. Some of them are as follows:

• Macro Economic Changes: Older workers face this issue a lot. They have spent their lives working and perfecting a certain skill and all of a sudden it is no longer required. Consider the case of Dubai which was an oil rich economy until very recently. However, now the economy thrives more as a logistical and tourism hub. Hence, all the workers who were skilled in oil drilling and refining in Dubai, are now unemployed whereas there is a shortage of supply chain professionals and hotel staff.

• Geographic: In many cases, the skills sets that the worker possesses may still be useful. However, their use maybe in a far off geographical region. Workers may be unwilling or unable to locate to such regions.

• Wage Related: In many cases, workers will simply reject the offer for new jobs because of the considerably less wages that are being paid to them. This could happen as a result of the abundance of labor available at exceedingly cheap prices.

Cure

The two most prescribed cures for structural unemployment are:

• Quick and Efficient Training: States must take the onus of recognizing this structural change at the right moment and create training programs to upskill their labor force. Governments must provide these trainings free or at concessional rates and must facilitate job placements post the completion of training.

• Breaking Geographical Barriers: Also, with the emergence of information technology, many geographical barriers can be broken and workers can be enabled to work from remote locations with the skill set that they do possess.