Unemployment throughout an economy can change for structural or cyclical reasons. The causes of structural unemployment are shifts in the economy, improvements in technology, and workers’ lack of job skills required for them to find employment. Conversely, swings in companies’ business cycles can cause cyclical unemployment.

What Is Structural Unemployment?

Unemployment is a measure (typically a percentage) of how many people in an economy’s potential workforce currently have jobs. Structural unemployment is a type of long-term unemployment that has multiple causes, one of which is the inability of companies to provide unemployed people with jobs that fit their skills.

Key Takeaways

  • Structural unemployment can happen because of changes in technology or shifting demographics.
  • Cyclical unemployment is mostly related to changes in business conditions that affect the demand for workers.
  • Cyclical unemployment can become structural when those that are unemployed for a long time during a cyclical downturn need to develop new skills to become employable.

Assume, for instance, that there are major technological advances in industries throughout an economy. Companies need to hire workers who have technical skills, such as programming and mathematical skills, to continue their growth. Individuals without those skills may become marginalized and experience structural unemployment because there is a mismatch between jobs in the market and their abilities.

What Is Cyclical Unemployment?

Cyclical unemployment, on the other hand, deals with an economy’s business cycle. Cyclical employment is cause by job losses during downturns and contractions in the business cycle. An actual recession, which is when an economy has negative growth for two or more quarters in a row, is not required to cause this type of unemployment.

A general lack of demand is one of the main factors that causes cyclical unemployment. When there is a drop in consumer demand, business revenues usually decline. Consequently, companies have to lay off workers to cut costs and maintain their profit margins.

For example, the U.S. economy faced cyclical unemployment during the Great Recession. As more and more subprime mortgage lenders filed for bankruptcy, homes were not being constructed. Consequently, many people who were employed as construction workers and homebuilders lost their jobs and experienced cyclical unemployment.

When Does Cyclical Unemployment Become Structural?

Cyclical unemployment becomes structural unemployment when workers remain unemployed so long that when the economy begins to expand and companies start hiring again, they need to acquire new skills to be competitive. Over time the skills needed to perform certain tasks can change, and when new positions become available, companies may not consider candidates without these new abilities.

For example, between 2009 and 2011, during the recession following the 2007-2008 financial crisis, workers in the 55 to 64 age bracket were unemployed almost twice as long as those aged 20 to 24. Displaced older workers had much greater difficulty finding new jobs, despite the fact that the unemployment rate for their age group was nearly one-third that of their younger counterparts.

Many factors contributed to the higher unemployment rate among those 55 to 64, but two of the key reasons are that older workers are less likely to acquire skills that will keep them competitive and more unwilling to relocate for a new job. As a result, workers remained unemployed due to a mismatch between the expertise they had and the skills that were in demand, which led to structural unemployment.