What is a Structural Change

A structural change is an economic condition that occurs when an industry or market changes how it functions or operates. It shifts the assumptions used to determine courses of action or how a market trades. These changes are often sparked by new economic developments, global shifts in the pools of capital and labor, changes in resource availability due to war or natural disaster, or changes due to the supply and demand of all resources. A big factor could be from politics, with either a new regime coming to power or major overhauls in existing laws, especially with regard to business regulation and taxation.

Not only will businesses have to adapt to the new order, so will markets. For example, in the futures market, crude oil is usually in contango, which means that oil for delivery in the future is more valued than spot oil is today. If there are production cutbacks, either by decree from producing countries or political instability in the producing regions of the word, fears of scarce reserves will arise. The oil market may then undergo a structural change. Demand for near-term oil may increase, as people would fear lower supply levels in the future. Consequently, the market may shift to backwardation, where oil today is more valuable than future oil.

BREAKING DOWN Structural Change

Innovation is a big driver behind structural change. Areas of the economy with large research and development (R&D) components can have big impacts on change. The advent of the smartphone was a huge change for both businesses and consumers as several technologies - from computers, to telephones, to flashlights - were available to everyone in a compact device. There is an app (application) for everything, including monitoring a bank or commercial account, finding information, and making purchases.

Technology and Structural Change

Agricultural advancements led to the rise of factory farming. Even labor unions caused changes in the workplace forcing companies to adapt. And now technology is causing change in service industries with online shopping, kiosks for ordering in fast food restaurants, and voice operated devices allowing people to ask questions at home and order products without the process of phone calls or even website visits.

On a country level, structural changes move them through the development process thanks to shifts from primary, to secondary, and finally to tertiary production. Technical progress is seen as crucial in the process of structural change as it involves the obsolescence of skills, vocations, and permanent changes in spending and production resulting in structural unemployment.