Steve Bain

Structural Unemployment Explained

Structural unemployment is one of the four broad definitions of unemployment that economists are concerned with, and of those four it is arguably the most important. It is certainly the most difficult to reduce, and when it occurs it is usually at the worst possible time.

Political pressures make it very difficult to put forward the most appropriate market-led approaches to resolving structural unemployment, and because of that it is often brushed under the carpet and hidden away, typically via a redefinition of what actually counts as unemployment and what does not.

That being the case, there are plenty of examples throughout the western world of entire communities that have been allowed to fall into decline and decay, with all manner of societal and human costs associated with it.

In this report I'll be discussing the important aspects of structural unemployment, what it is, and what causes it. I've provided links to other reports that look into other specific related issues such as the costs/effects of long-term unemployment, and measurements of the true extent of the problem once the hidden unemployed are included in the statistics.

What is Structural Unemployment

Structural unemployment is a form of unemployment that results, for one reason or another, from skilled workers being made redundant and then being unable to find alternative employment commensurate with their skill levels. Typically because the industries in which they had worked have either been replaced with a new industry, their employer has relocated to a new area, or their employer has replaced their workers with labor saving machinery.

In a functioning free-market economy it is usually difficult for structural unemployment to persist for long periods of time, because the necessity for unemployed workers to find alternative jobs will ensure that 'labor mobility' is as high as is necessary to find those jobs. In other words, if a redundant worker cannot find suitable work near to his/her home that pays a wage commensurate to his/her level of skills, then he/she will be forced to move to a new location for work, or accept a lower salary nearer to home.

This, of course, assumes that new jobs are needed and that there is no sufficient provision of welfare payments to sustain long-term unemployment. Lack of such welfare provision means that there is significant extra hardship heaped on the redundant worker in the early stages of unemployment, and this makes it difficult in practice for governments to stand by and do nothing.

Unfortunately, the standard government policy response of welfare provision ad-infinitum is known to perpetuate the problem and lead to long-term worklessness with devastating costs for the economy, the individual, and for society as a whole. For more details on this, see my report:

Structural Unemployment Example

Short-term cyclical unemployment will be unpleasant if it comes as a result of an involuntary action, and it may have some financial costs associated with it if the newly out-of-work person can only find alternative employment at a lower wage rate, but these inconveniences pale into insignificance when compared to the human costs of a long-term increase in the structural rate of unemployment.

The 1980s were a turbulent time for many of the developed-world economies, but the UK was hit particularly hard by the economic troubles of the period.

Oil prices had quadrupled in the 1970s, and inflation had gathered pace to such an unacceptable level that the government had to prioritize its reduction. With the UK being a major net oil producer at that time, the oil price rises caused foreign revenues to flow in (both to purchase oil and for speculative 'hot money' reasons), which in turn had the effect of sharply raising the currency exchange rate. That made imports relatively cheap compared to UK-produced goods (primarily manufactured goods).

This resulted in a large swing from consumption of domestic goods to foreign goods, which can be regarded as a fall in aggregate demand. As you might expect, this played a big part in getting inflation under control, but the manufacturing industry took a huge blow, many businesses were closed at this time, and millions of workers lost their jobs.

Worse still, the structural unemployment that followed included millions of workers with skills that were not transferable to other industries, meaning that finding alternative work at a wage rate anywhere near to what they had lost was not possible. These job losses were also geographically concentrated, and many of the factories that closed were key industries within their local communities, meaning that many unrelated businesses relied on custom from these newly unemployed people, and that custom fell sharply. The economic consequences of these knock-on effects were devastating for these communities.

But the worst was yet to come.

The actual unemployment rate permanently rose much higher than official measures, and unemployed worker after unemployed worker was allowed to fall off the statistics as they became hidden unemployed, or they registered for sick pay with questionable back-pain claims or mental-health problems. Many of the mental health claims were genuine, and they had a severe impact on the children raised in households where no one worked.

Aspiration levels plummeted, anti-social behavior increased, as did teenage pregnancies, drug use, vandalism and petty crime. Educational attainment levels dropped off a cliff, and a generation of young people became virtually unemployable in towns with very little economic activity. Even today, 40 years after it all went downhill, many of these communities are still heavily deprived and real wages there are low by national standards.

This is the true cost of long-term structural unemployment when it is geographically concentrated. It becomes an inter-generational problem with no easy solutions. If the job losses had been geographically dispersed there would have been more opportunity to absorb the damage, but this was not the case.

Standard economic thinking at the time was that the labor market would be mobile i.e., that people would relocate to areas with better prospects, but people had local ties. Then there was the problem of falling property values in the worst hit areas, and finding a home-buyer at all because very few people would want to move into such an area.

Causes of Structural Unemployment

There are three main causes of structural unemployment, which I will briefly discuss below.

Deindustrialization in America and elsewhere

The process of deindustrialization has had a major impact on the natural rate of unemployment in many developed economies, and that’s because of the nature of global trade. The services sector of the economy tends to produce fewer tradeable goods e.g., an accountant serves a local population, but a manufacturer produces goods that can be shipped anywhere in the world.

Because of the tradeable nature of goods produced by the manufacturing industry, the cost savings of relocating to a country with a cheaper labor force is often irresistible. A choice between relocating to cut costs, or staying put and being driven out of the market altogether by low-cost competitors, is not really a choice at all.

Where manufacturing has survived in the developed world it is usually in high-tech operations that require a highly skilled workforce, or in countries that have subsidized continued production in some way.

Skills Mismatch

These develop when a new industry replaces an existing industry such that the workers in the old industry have antiquated skills that are needed by the new industry. This can be associated with deindustrialization but it goes further in that economic development comes with a natural replacement of old industries with new industries e.g. the replacement of copper wire with fiber optics.

Technological Unemployment

This results not from the replacement of old industries with new, but of old production techniques with new. Typically the new methods of production lead to labor saving technologies via the introduction of machinery in the place of workers. This is a process that gave rise to the original labor movement in 19th Century England, with the Luddite resistance to labor saving machinery in the textiles industry. For more details see my report about:

Technological unemployment can be a major component of structural unemployment, but it has not in itself caused significant problems to date, because new jobs have always been created as old jobs have been destroyed. However, there is a significant question mark with regard to future jobs, because the latest innovations in technology, i.e. artificial intelligence and advanced robotics, are a threat to many high-skilled occupations, not just the low-skilled occupations of past times.

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