Structural Unemployment
Structural unemployment is unemployment that arises from a mismatch between the skills, locations, or characteristics of workers and the requirements of available jobs, and that persists even when the economy is operating at full capacity. Unlike cyclical unemployment, it is not caused by a deficiency in aggregate demand, and unlike frictional unemployment, it is not merely a temporary result of the search process. It reflects deeper features of the economy, including technology, the composition of demand, and the functioning of labour markets.
Causes
Structural unemployment arises from changes in the economy that alter the demand for different types of labour. Technological change can render some skills obsolete, while creating demand for new skills that existing workers may not have. Changes in the composition of demand, including shifts toward services and away from manufacturing, can leave workers in declining industries without suitable employment. Globalisation and trade can displace workers in industries exposed to import competition.
Mismatches of location also cause structural unemployment, when jobs are available in some regions but workers are unable to move to them because of housing costs, family ties, or the costs of relocation. Institutional factors, including the level of unemployment benefits, the level of minimum wages, and the extent of employment protection, can affect the persistence of unemployment by changing the incentives to seek and to accept work.
Distinction from other types
Structural unemployment is distinguished from frictional unemployment, which reflects the time taken to match workers and jobs and which exists in any dynamic economy, and from cyclical unemployment, which reflects a deficiency in aggregate demand and which falls when demand recovers. The distinction matters for policy, because the appropriate responses differ, and because the same observed unemployment rate may reflect different combinations of the types.
In practice, the boundaries are not sharp. A prolonged period of weak demand can lead to structural unemployment through hysteresis, as workers lose skills and become detached from the labour market, and as firms reduce investment in training. Conversely, structural barriers can slow the recovery from a cyclical downturn. The composition of unemployment therefore changes over time, and policy must address both the cyclical and the structural components.
Consequences
Structural unemployment imposes costs on the individuals affected, including lost income, the erosion of skills, and the loss of attachment to the labour market, which can become self-reinforcing. It reduces the productive capacity of the economy, because some resources are unused, and it raises inequality, since the burden falls on particular groups and regions. Persistent structural unemployment can also increase social and political tensions.
The effects on the economy are distinct from those of cyclical unemployment. Because structural unemployment is not caused by deficient demand, it cannot be reduced by demand management without generating inflation. Attempts to reduce it through expansionary policy will mainly raise prices, since the economy is already at potential. The reduction of structural unemployment therefore requires measures that address the underlying mismatches.
Policy responses
Policy responses to structural unemployment focus on improving the matching of workers and jobs and on raising the adaptability of the labour force. Education and training programmes can provide workers with the skills in demand, and lifelong learning supports adaptation to technological change. Active labour market policies, including job search assistance and subsidised employment, support the movement of workers into jobs.
Measures to improve mobility, including policies that address housing costs and the portability of benefits, help workers to move to where jobs are available. The design of the tax and benefit system affects the incentives to seek and to accept work, and reforms can reduce the effective marginal tax rates that discourage employment. Regional policies, including investment in infrastructure and in the business environment, can create jobs in areas affected by structural change, and they address the geographic dimension of the problem.
Measurement and estimation
Estimating structural unemployment requires distinguishing it from the cyclical and frictional components, which is difficult because only the total is observed. Analysts use measures of the natural rate, based on the relationship between unemployment and inflation, and they examine the behaviour of vacancies and of labour market flows to assess the extent of mismatch. The estimates are uncertain and are revised as the economy evolves.
The measurement of structural unemployment also involves the analysis of the matching process. Indicators of mismatch, including differences between the skills demanded and supplied, and between the locations of jobs and workers, provide evidence about the extent of structural imbalance. The behaviour of the Beveridge curve, which relates vacancies to unemployment, indicates whether the efficiency of matching has changed, and shifts in the curve suggest changes in structural unemployment.
The Beveridge curve
The Beveridge curve plots the relationship between the vacancy rate and the unemployment rate, and it provides information about the efficiency of the labour market. A position on the curve reflects the balance of demand and supply, with high vacancies and low unemployment indicating a tight market and the reverse indicating slack. Shifts of the curve indicate changes in the efficiency of matching.
Outward shifts of the Beveridge curve, in which vacancies and unemployment are both high, indicate a deterioration in matching, which raises structural unemployment. Such shifts have been observed after deep recessions and after structural changes, and they reflect mismatches of skills, of geography, and of preferences. The analysis of the Beveridge curve therefore informs the assessment of structural unemployment and the design of policies to improve matching.
Policies and their effectiveness
The effectiveness of policies to reduce structural unemployment depends on the source of the mismatch. Training programmes are most effective where the mismatch is one of skills, while relocation assistance is relevant where the mismatch is geographic. Job search assistance improves the flow of information and can raise the efficiency of matching, and it is most effective where frictions in information are significant.
The evidence on the effectiveness of active labour market policies is mixed. Some programmes, including well-designed training and job search assistance, have been found to raise employment and earnings, while others, including some public employment schemes, have had limited effects or have displaced private employment. The design of the programmes, including their targeting, their duration, and their integration with other services, determines their effectiveness, and the evidence informs the choice among instruments.
Structural unemployment and policy trade-offs
Structural unemployment poses difficult policy trade-offs. Because it is not caused by deficient demand, expansionary policy cannot reduce it without generating inflation, and the attempt to do so may destabilise expectations. The reduction of structural unemployment requires measures that address the underlying mismatch, which operate over the longer term and may involve costs as well as benefits.
The trade-off between the objectives of reducing unemployment and of maintaining price stability is central to the design of policy. In the short run, an economy with high structural unemployment may face a choice between accepting higher unemployment and accepting higher inflation, and the appropriate balance depends on the costs of each. In the long run, policies that reduce structural unemployment can improve both outcomes, by lowering the natural rate and allowing the economy to operate at higher employment with stable inflation.