Structural Unemployment

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Structural Unemployment?

Structural unemployment is caused when there is a disparity between the knowledge and skills that the employer demands offered by their employees. It is usually generated due to several changes like recession, deindustrialization, etc. As a result, individuals cannot work in the economy because of different skill requirements.

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Structural unemployment generally takes one to two years to get resolved or is sometimes slightly higher. Therefore, one should conduct training programs to get the workers updated with the jobs available to fix the problem of structural unemployment timely. In modern times, production and manufacturing has shifted to machine-oriented jobs, which kills the need for human resources in the organization.

Key Takeaways

  • Structural unemployment happens if there is a difference between the ability and the knowledge the employer demands their employees provide.
  • It is usually due to changes such as recession, deindustrialization, etc. Therefore, individuals cannot work in the economy due to distinct skill demands.
  • The top causes of structural unemployment are geographic, macroeconomic changes, and wage-related.
  • The cure for structural unemployment is efficient workforce training and breaking geographical barriers. The disadvantages of structural unemployment are inefficiency, support costs, crime, and instability.

Structural Unemployment Explained

Structural unemployment is a mismatch between the workers’ skills in the economy and the skills that the employers demand from the workers. The main reason for this type of unemploymentUnemploymentUnemployment refers to a situation where individuals capable of working seek active opportunities for work but cannot find any for various reasons.read more is the technological changes in the market that make the skills of many job laborers obsolete. For example, many lucrative manufacturing jobs in the United States have been lost over the last 30 years. The jobs related to production have migrated to the areas requiring low costs in China and other countries from the sub-continent.

Structural unemployment economics goes beyond just outdating workers’ skills. Technological development, changes in the economy, and even government policies could influence the dip in the employment rate within a country.

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Causes

The most prominent reason for structural unemployment graph rising is the mismatch of workers’ skills with the jobs available. The causes of structural unemployment disparity of skills are as follows:

Structural Unemployment

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#1 – Geographic

There are places where the worker’s job skills match the jobs available, but these places can be far from the worker’s geographical region, and the workers are not ready to relocate to such areas.

#2 – Macro-Economic Changes

Older workers face these issues. They have worked in a certain skill with perfection. But suddenly, the jobs related to that particular skill are found nowhere, and their skills have become obsolete. Let us take the example of Dubai, which is known as an oil-rich company. However, in today’s scenario, it becomes an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more that depends more on tourism and logistics. Therefore, all the workers with expertise in oil drilling were jobless, and the hotel had a shortage of workforce professionals and staff.

Wage-related is one of the causes of structural unemployment where workers often do not accept the job because the package they offer is very little. However, such low packages are an abundance of labor that is easily available at a low price.

Examples

Let us consider the following examples of structural unemployment economics to understand the concept in detail.

Example #1 – Industry Shifts

Mr. Gorge was a manufacturing expert. He has managed the shop floor since he was 19 years old. Later, manufacturing jobs started shifting from the U.S. to China due to the new economyNew EconomyNew Economy refers to industries that use innovative and cutting-edge technologies that boost industrial production and economic growth.read more. As a result, the current employer asked Mr. Gorge to leave the organization with a severance package. After leaving the job, Mr. Gorge could not find any job matching his skills. Somehow, he could find a position as a sales manager, which offered him very little pay and a lower post than his earlier post.

Example #2 – Seasonal Unemployment

A worker named Mr. Eden does manual labor work in the mango field for years, giving him employment for only four months a year. So, he manages his earnings by working in a commercial complex as a security guard.

Example #3 – Technology obsolescence

Mr. Dhal has experience in writing algorithms in a specific computer language. However, all know that technology quickly changes because the language has become obsolete. As a result, since the language is outdated, Mr. Dhal’s experience is useless in the market. Due to such technological changes, the employer of Mr. Dhal has asked him to leave the organization. After that, he had to indulge in the job relating to soft skills training as he found his expertise nowhere.

Solutions

Despite the causes of structural unemployment graph rising is beyond the control of individual manufacturers or even an industry at large, there are a few solutions that can help revamp this situation. Few of these solutions are as discussed below.

1 – Efficient Training of the Workforce

States should recognize the changes needed in the economy, create training programs to guide the workforce, and update them with technological and other changes. As the cost of the training program cannot be affordable for some workers, the government should try to provide such training programs free of charge and facilitate the placement of jobs after the completion of training programs.

With the development of information technology, it is easier to break geographical barriers, and the workers can easily work from distant locations with the set of skills they possess.

Disadvantages

Let us understand the disadvantages of structural unemployment economics through the explanation below.

#1 – Inefficiency

The main problem with structural unemployment is the inefficiency factor. When there is no work for a huge percentage of workers, the high amount of workforce used for production goes unused. Only efficient economies can use the labor forceLabor ForceThe labor force (LF) refers to the number of persons working (employed) and not working but actively seeking work (unemployed). It excludes the homemakers, retired personnel, and discouraged workers from the count.read more to its maximum.

#2 – Support Costs

Another disadvantage of structural unemployment is the country’s cost while supporting the unemployed workers at a given point. Although some countries do not pay to help the unemployed, some countries provide benefits in cash or kind to the unemployed workforce.

#3 – Instability

Structural unemployment also increases instability in the country. Although structural unemployment at a lower level in modern economies is necessary, there can be unrest when it elevates its peak. That is because all job seekers want to get employed to earn money, but if they fail to get a job, they may cause violence or push the government to change.

#4 – Crime

Unemployment and crime are correlated. In need of money, people start indulging in robbery to meet their living expenses. Crime increases the instability in the area. It results in spending money on security rather than producing goods and services.

Frequently Asked Questions (FAQs)

What is the difference between frictional and structural unemployment?

Frictional unemployment refers to unemployment including people who keep transitioning between jobs. It is voluntary and not related to the economic cycle. In comparison, structural unemployment is the result of economic shifts. It also includes the technology changes and the downturn in the industry.

What are the solutions to structural unemployment?

The solutions to structural unemployment are education and training that increases the ability to find a job in a new industry—in addition, moving subsidies and discarding or decreasing the unemployment advantages to get a suitable job soon.

What are the effects of structural unemployment?

Structural unemployment is a long-lasting situation that happens due to fundamental economic changes. It is a crucial financial problem as it has a long-lasting effect connected with challenges and tackling the issue. As a result, it can increase the natural unemployment rate.

What is structural unemployment vs. cyclical unemployment?

Structural unemployment refers to unemployment that lasts for years. It happens due to technological changes or a demographic shift. In comparison, cyclical unemployment happens due to the decline of the economy. It is related to the changes in business situations affecting worker demand.

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