Structural unemployment and cyclical unemployment occur throughout an economy. Structural unemployment is caused by shifts in the economy, improvement in technology and workers' lack of requisite job skills, which makes it difficult for workers to find employment. Conversely, swings in companies' business cycles cause cyclical unemployment.

Structural Unemployment

Structural unemployment is a type of long-term unemployment that has multiple causes, such as the inability of companies to provide unemployed people with jobs that fit their skills.

For example, assume there are major recent 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 technical skills may become marginalized and they may experience structural unemployment because there is a mismatch between jobs in the market and workers.

Cyclical Unemployment

On the other hand, cyclical unemployment deals with an economy's business cycle. Cyclical unemployment occurs when there are job losses during downturns and contractions in the business cycle. It doesn't take an actual recession, which is when an economy has negative growth for two or more quarters in a row, to cause this type of unemployment.

A 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 2008 financial crisis. 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 home builders lost their jobs and experienced cyclical unemployment.

When Does Cyclical Unemployment Become Structural?

Cyclical unemployment becomes structural unemployment when workers remain unemployed long enough that they need to acquire new skills to be competitive when the economy begins to expand and companies begin hiring again. 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 skills.

For example, between 2009 and 2011, during the recession following the financial crisis, workers in the 55-64 age bracket were unemployed almost twice as long as those aged 20-24. 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 this, but two of the key reasons are that older workers are less likely to acquire skills that will keep them competitive or relocate for a new job. As a result, they remain unemployed due to a mismatch between the expertise they have and the skills that are in demand, which leads to structural unemployment.

(For related reading, see: The Cost of Unemployment to the Economy.)