What Is Structural Unemployment?
Structural unemployment is a longer-lasting form of unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors such as technology, competition, and government policy. Structural unemployment occurs because workers lack the requisite job skills or live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what companies need and what workers can offer.
- Structural unemployment is long-lasting unemployment that comes about due to shifts in an economy.
- This type of unemployment happens because though jobs are available, there’s a mismatch between what companies need and what available workers offer.
- Structural unemployment can last for decades and usually requires a radical change to reverse.
- Technology tends to exacerbate structural unemployment, marginalizing certain workers and rendering particular jobs, such as manufacturing, obsolete.
- Structural unemployment is a more severe form of unemployment compared to cyclical unemployment, frictional unemployment, or seasonal unemployment.
How Structural Unemployment Works
Structural unemployment is caused by forces other than the business cycle. This means that structural unemployment can last for decades and may need radical change to redress the situation. If structural unemployment is not addressed, it can increase the unemployment rate long after a recession is over and increase the natural rate of unemployment, which is also known as “frictional unemployment.”
Hundreds of thousands of well-paying manufacturing jobs were lost in the United States over the past three decades as production jobs migrated to lower-cost areas in China and elsewhere. This decline in the number of jobs is responsible for a higher natural rate of unemployment. Growing technology in all areas of life increases future structural unemployment, because workers without adequate skills will get marginalized. Even those with skills may face redundancy, given the high rate of technological obsolescence and the growing use of artificial intelligence (AI).
Structural unemployment is influenced by more than just the business cycle, impacted by major mismatches in the employment system.
Causes of Structural Unemployment
There are several common triggers that cause structural unemployment. One of the primary causes of structural unemployment is technological changes. As industries move from one process to another and harness technological capabilities, many jobs and roles become obsolete. Companies may also seek ways to leverage technology as cost-cutting measures, putting their workforce at risk as the business seeks more efficient ways to operate.
By extension, structural unemployment may be caused by poor training or a lack of education programs. As workers get replaced by more efficient processes, workers must adapt by learning new business practices. Should they fail to do so, they may perpetuate structural unemployment by not having an appropriate skillset.
Structural unemployment may also be caused by competition and globalization. Consider how different wage rates around the world may entice companies to see offshore manufacturing processes. Companies may choose to forgo hiring more skilled domestic workers that demand higher compensation in favor of workers willing to be employed for less.
How to Overcome Structural Unemployment
As a society, there are several ways an economy can prioritize overcoming structural unemployment as a result of industry shifts or technological advancements.
- Continually develop professional skillset. For many workers, structural unemployment may occur as their job is no longer needed. Workers who do not continually learn or professionally develop are more at-risk of not having the skillset needed in an advancing, evolving economy.
- Build professional network. As structural unemployment occurs, it may be appropriate for workers to evaluate their skill set and interests. Once workers have identified what they want to do for employment, there's a tremendous benefit to having a large professional network that may be able to refer others to open positions. This is especially true in situations where a worker may not have the technical skill set of a more experienced worker and must rely on the reference's positive recommendation to the hiring company.
- Research market trends. Instead of being stagnant in their current role, workers can better understand industry trends, sales projections, and innovation in their market. As people learn more about their line of work, they can get a better sense of what that industry will look like in the future. In some cases, workers may find their job is on a direct path to obsolescence and can proactively attempt to move into a more secure role.
- Relocate. Though some governments may subsidize the move to a different area for work, workers may consider whether their skill set is appropriate for their geographical region. As demographics change and companies change locations, it may make more sense for a worker to live somewhere else for greater job security.
- Incentivize Work. If a government wants to minimize structural unemployment, it may want to consider minimizing unemployment benefits. For as long as workers have compensation without working, workers may be less incentivized to develop new skills or seek better opportunities.
In 1933, the United States experienced its highest rate of unemployment. During the Great Depression, unemployment peaked at 24.7%.
Structural Unemployment vs. Other Types of Unemployment
Structural Unemployment vs. Cyclical Unemployment
Structural unemployment and cyclical unemployment are both referred to as involuntary forms of unemployment. This means individuals are unwillingly without a job; though they may be looking for employment, they simply haven't found a role.
The difference between the two often resides in the depth, length, and severity of unemployment. Cyclical unemployment occurs in large part due to spending habits, recessions, and government monetary or fiscal policy. As many industries ebb and flow with success, so does the labor market. Cyclical unemployment is often marked by shorter-term unemployment that rises and falls with economic cycles.
Certain industries may be more exposed to cyclical unemployment rather than structural unemployment. For example, consider long-standing industries such as real estate. While the real estate sector does undergo innovation, it is more prone to cyclical unemployment as a result of economic recessions or contractionary monetary policy.
Structural Unemployment vs. Frictional Unemployment
Frictional unemployment is defined as a voluntary form of unemployment. Individuals often leave their jobs to develop other skillsets, return to school, or prioritize work-life balance by taking on less demanding roles. Individuals who are frictionally unemployed are usually actively seeking roles or simply between jobs. These individuals can often return to their old form of work but choose not to.
This is in strong contrast to structural employment in which people do not have a say in being unemployed. In addition, frictional unemployment is often marked by the election to learn something new as opposed to being forced out of a market via structural changes. Frictional unemployment is often on a case-by-case basis (though the pandemic might have prioritized work-life balance for many), whereas structural unemployment is more heavily rooted in entire industries or markets.
Structural Unemployment vs. Seasonal Unemployment
While structural unemployment is deeply rooted in the economy, seasonal unemployment is caused by temporary fluctuations in the market. Often spurred by the holidays or the seasons, some jobs simply come and go each year. Snow plow operators or tax return preparers may not work the entire year in their roles due to changing demand throughout the year.
Like frictional unemployment, seasonal unemployment is usually considered voluntary as it is implied that a role will not be for the full year when it is awarded. It is also different from structural unemployment in that it usually lasts a short period of time (often less than a full calendar year).
Disadvantages of Structural Unemployment
While the 2007-2009 global recession caused cyclical unemployment, it also increased structural unemployment in the United States. As the jobless rate peaked over 10% in October 2009, the average unemployment period for millions of workers rose significantly. These workers’ skills deteriorated during this time of prolonged unemployment, causing structural unemployment. This has the severe downside of making it even harder for workers to find and retain jobs.
The depressed housing market also affected the job prospects of the unemployed and, therefore, increased structural unemployment. Relocating to a new job in another city would have meant selling a home at a substantial loss, which not many people were willing to do, creating a mismatch of skills and job availability. Therefore, structural has the distinct disadvantage of being solved by potentially incurring major personal financial losses.
The same can be said about education or training. If a company is unable or unwilling to invest in either for their employee, it may be the employee's burden to seek opportunities on their own. Not only does this mean the employee will have to pay for the learning opportunities, the employee will likely be burdened with developing their skillset while working at their potentially full-time job.
The Bureau of Labor Statistics releases unemployment numbers each month on the first Friday at 8:30AM EST.
Structural Unemployment and COVID-19
During the COVID-19 pandemic, the United States economy underwent unprecedented changes in structural unemployment and cyclical unemployment.
At its peak, the United States unemployment rate more than quadrupled at the start of the pandemic, reaching 14.0% in April 2020. It's important to note that many of these job losses were temporary. However, consider the following examples of roles that were structurally impacted by COVID-19:
- Receptionists: As more companies shifted to full-time remote roles, there has been a systematic decline in front-desk workers, even for companies only commuting to the office several days per week.
- Product Demonstrator: As malls closed and shopping preferences shifted to online ordering, department store workers specialized in working with customers experienced a shift in what skillsets they needed.
- Event Coordinators: As events went remote, event planners experienced tremendous pressures to change skillsets and become more technologically savvy.
Also as a result of COVID-19, many individuals voluntarily left the workforce. Though total unemployment has dropped to 3.5% as of the end of 2022, Jerome Powell suggested this number may be understated due to those who are not looking for work. As a result, it is implied that "true" unemployment may be higher as a result of deeper, more structural changes to the economy stemming from the pandemic.
Over the past decade, France has also been hit hard by structural unemployment. Thise often arises from the fact that a large portion of France’s workforce is participating in temporary second-level jobs with little chance of being promoted to long-term contracts, forcing them to strike. This results in a lack of job flexibility and little job mobility, sidelining many French workers who have not adapted to new tasks and skills.
President Emmanuel Macron came into office in May 2017, when the unemployment rate stood at 9.5%. He vowed to address the country’s strict labor laws and make it more “business friendly.” Labor unions and the Macron government began negotiating to help reduce the ranks of the structurally unemployed, and the trends have been encouraging. As of the end of 2019, France’s unemployment stood at 8.1%, down from 8.7% at the start of the year and the lowest since 2009.
Macron’s stated goal was to get to 7% by the year 2022. For most of the year, unemployment remained stable fairly close to this level, reaching 7.3% in Q3 2022. In the Q3 2022 unemployment report, France's long-term unemployment rate (those without work for at least one year) stood at 2%, 0.4% less than its lowest level hit in Q2 2009.
What Is the Best Example of Structural Unemployment?
As cell phone became more popular, the industry shifted away from landline telephones and technology. As a result, those that gained technical knowledge in the mobile phone industry likely found new jobs, while those that fell behind didn't. Due to the structural change of the world, some people who did not adapt from the world moving towards cell phones may have experienced structural unemployment.
What Tends to Cause Structural Unemployment?
Structural unemployment is caused when there are major changes to how the world operates. Consider the implications of COVID-19. As consumer trends change and the world adapts to new preferences, workers must adapt or they risk losing their jobs due to obsolescence.
Is Cyclical Unemployment Better Than Structural Unemployment?
In many ways, cyclical unemployment is often more preferential than structural unemployment. Cyclical unemployment usually lasts for a shorter amount of time. Cyclical unemployment also usually follows the ebb and flow of the economy and market cycles. Structural unemployment is more deeply rooted in markets and skillsets, making it harder to overcome.
Why Is Structural Unemployment Bad?
Structural unemployment is tough to overcome because of how engrained some jobs used to be in the economy, yet these jobs are no longer needed. To overcome structural unemployment, workers usually need to be willing to learn new skills, adapt to using new products, change industries, or physically move to new locations. As opposed to cyclical unemployment that is resolved through market cycles or seasonal unemployment that changes with time, structural unemployment requires deliberate action to overcome.
The Bottom Line
Structural unemployment occurs when there are fundamental changes to the economy that change the demand of services. In these cases, people lose their jobs because they are simply no longer needed, mainly because of consumer preferences. Structural unemployment is a more severe type of unemployment compared to cyclical, frictional, or seasonal unemployment.