Structural Unemployment

What is Structural Unemployment?

Structural unemployment is a category of unemployment caused by differences between the skills possessed by the unemployed population and the jobs available in the market. Structural unemployment is a long-lasting condition that is caused by fundamental changes in the economy.

Structural unemployment is a significant problem in economics because of its long-lasting effects and challenges associated with overcoming the issue. It can result in an increase in the natural unemployment rate. However, it is not always an indicator of a recession in an economy because it can be created even during periods of economic growth.

What Causes Structural Unemployment?

Structural unemployment is caused by external processes or events that trigger fundamental changes in the economy, including:

1. Technological changes

Technological advancements can significantly affect an economy. The introduction of new technologies can cause some of the existing jobs to become obsolete, leaving many people unemployed.

Also, new technologies can substantially increase productivity, allowing companies to reduce their labor force without harming their overall output. In such a scenario, many workers face the loss of their jobs, and structural unemployment will arise.

2. Competition

Competition is another factor that can lead to structural unemployment in an economy. For example, globalization is one of the driving forces behind increased competition around the world. Developing countries generally provide cheap labor; many companies from developed countries relocate their manufacturing facilities to developing nations. As a result, workers who were previously involved in manufacturing become unemployed.

Although the geographic immobility of a population is not a direct cause of structural unemployment, it can severely worsen its effects. For example, if a population in a high unemployment region is not willing to relocate to where jobs are abundant, high unemployment will continue.

How to Overcome Structural Unemployment?

It is not easy to overcome structural unemployment. Due to the nature and the scale of the changes in an economy, policymakers frequently cannot directly address the problem. However, the following actions may be considered to improve the situation:

1. Education and training

The government provides support in the form of education or training to the unemployed to increase their skills for finding a job in a new industry.

2. Relocation subsidies

The government subsidizes the relocation of unemployed individuals from regions with high structural unemployment to other regions. In addition, the government can offer subsidies or incentives to companies to create job opportunities in depressed regions.

3. Decrease or remove unemployment benefits

The government can choose to remove unemployment benefits to incentivize the unemployed to find a job as soon as possible.

Additional Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA®) certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Cyclical Unemployment
• Economic Rent
• Help-Wanted Index (HWI)
• Labor Force KPIs
• Pigou Effect
• See all economics resources