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Structural Unemployment

The discrepancy between the skills of the unemployed population and the jobs available on the market

What is Structural Unemployment?

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

 

Structural Unemployment - Woman Laid Off

 

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 the 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 its 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 geographical immobility of the population is not a direct cause of structural unemployment, it can severely worsen its effects. In case the population in high unemployment regions is not willing to move to other parts of the country with a better employment situation, the unemployment will last longer.

 

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 for obtaining education or training to the unemployed to increase their qualifications in finding a job in new industries.

 

#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 Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Cyclical Unemployment
  • Economic Rent
  • Labor Force KPIs
  • Pigou Effect

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