Structural Unemployment

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Definition of Structural Unemployment:

Structural unemployment is unemployment resulting from a surplus of workers in a particular field, especially when the jobs have been made obsolete by economic developments such as technological change or demographics. 

Detailed Explanation:

Economists estimate that the full employment rate is between 94 and 96 percent (meaning the unemployment rate is from 4 to 6 percent). Some unemployment is inevitable – even healthy.  An unemployed person must meet three criteria: 1) not have a job, 2) be willing to work, and 3) demonstrate that he or she is actively looking for employment by performing at least one job search task within the last four weeks.
Economists separate unemployment into three categories: frictional, structural, and cyclical. Frictional unemployment occurs when market inefficiencies prevent people from identifying and starting a job as soon as they want one. The process of applying, interviewing, and accepting a job takes time. Structural unemployment results when economic progress may leave some workers behind. Jobs may be available in areas where workers are unwilling to relocate. Finally, cyclical unemployment is caused by changing labor demands resulting from business cycles. The full employment rate includes frictional unemployment and structural unemployment but excludes cyclical unemployment. 

Structural unemployment is caused by the obsolescence of workers’ skills due to technology or other factors that reduce the demand for their skills. Structural unemployment is not influenced by changes in the business cycle. An increase in the demand for goods or services will not bring the structurally employed back to work, which means those impacted may be out of work for a long time.

Technology has displaced workers for centuries. Agricultural equipment has replaced sharecroppers. Word processing software, answering machines, and other office technology have displaced many secretaries. Historically, workers have adjusted by acquiring new skills for new jobs. But as jobs become more complex and require more training it becomes harder to get the training required by new jobs. The good news is jobs are often available. The bad news is the disparity between the skills required and what the workers can offer, or between the location of the job and the inability of the worker to move to the area. For example, robotics has reduced the demand for people manning a drill press but has increased the demand for computer programmers to program the robot that has replaced the drill press operator. Unfortunately, the drill press operator may not have the skills to program the robot. 

In another case, assume management chooses to outsource the manufacturing process to another company to lower its cost. The other manufacturer has a demand for drill press operators and may be willing to hire the laid-off worker, but the laid-off drill press operator may be unable to move because his home is underwater. Between 2007 and 2011 real estate values declined, and many homeowners had a mortgage balance that exceeded their home’s value. Homeowners have three unattractive options when confronted with this situation. They can sell their home and pay the difference between the loan balance and sales price at closing. In some cases, homeowners may negotiate a lower balance on their loan to prevent owing more than their home is valued when they sell it. (This is challenging and time-consuming with no guarantee.) Finally, they could choose not to move. Most choose not to sell. 

The drill press operator illustrates the primary difference between frictional and structural unemployment. Frictional unemployment normally occurs when someone with transferable skills decides to look for a different job. (Someone would be reluctant to leave their job unless they were qualified.) Structural unemployment happens when someone lacks the skill sets in demand. This makes structural unemployment more difficult to remedy because it usually lasts longer than the other types of unemployment. Structural unemployment is the primary cause of long-term unemployment. Any solution involves either providing an employee the needed skills in the changing economy or the ability to identify and move to an area with the jobs matching his skills. 

Management may choose to move manufacturing following a trade agreement, tax policy, or regulations that increase the cost. Each of these actions could potentially increase structural unemployment in a region.

Here's a fun video explaining this concept more.

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