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Structural Unemployment

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Structural Unemployment

What happens to an economy when there are many job openings, but few people have the necessary skills to work on these jobs? How do governments deal with persistent unemployment? How will robots affect unemployment?

All these questions can be addressed by understanding structural unemployment. This article will help you learn everything you need to know about structural unemployment. Interested? Then dive in!

Structural Unemployment Definition

Unemployment occurs when an individual is looking for a job, but he/she cannot find one. There are many reasons why a person can’t find a job. It could be that there are not enough job openings that fit their skills, or it could be that the job they can get is in another country, and they don’t feel comfortable moving.

Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.

Unlike other types of unemployment, such as frictional, structural unemployment is much more persistent and lasts for more extended periods. This type of unemployment has long-term consequences for the economy and can result from different factors.

For instance, the recent growth in innovation and new technologies has found economies lacking skilled labor that can meet the demand for job openings. Few people have managed to crack how to build a robot or an algorithm that performs automated trading in the stock market.

Whenever you have more people seeking jobs than there are available in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with structural unemployment. However, another condition that must be met is that the unemployment rate has to last for more extended periods.

Causes of Structural Unemployment

There are many factors that could lead to structural unemployment. The main causes of structural unemployment you should know of are: minimum wages, labor unions, and efficiency wages.

Minimum wages

Minimum wages refer to the minimum amount a worker is allowed to be paid in exchange for the work provided. The minimum wage is set by the government and all companies are enforced by law to pay their workers either at the minimum wage rate or above.

In industries where there is a surplus of workers supplying their labor, companies would want to decrease their wages, but they can't really lower the wages due to the government's imposed minimum wage. In such a scenario, there are more people supplying their labor than there are companies demanding labor at the minimum wage rate. This will cause some people to secure jobs while others will remain unemployed. The part that remains unemployed is known as structural unemployment and is caused by the government's minimum wage.

Labor unions

Labor unions are types of organizations formed by employees in a certain industry with the goal of increasing wages, benefits, and working conditions. Also known as "labor organizations" or "trade unions", labor unions are groups of people who get together to bargain with their employers via a process known as collective bargaining. When the negotiation process is successful, it culminates in an agreement that specifies working conditions for a certain length of time, including the wage rate for the employees.

When labor unions manage to negotiate higher wages for a certain industry where they have workers, this will discourage employers from hiring more due to the cost they face in improving and meeting the demands of labor unions.

Think about the cleaning industry where you have many unskilled laborourers, willing to offer their cleaning services. A labor union representing cleaners in an economy manages to successfully secure a pay increase for all the workers working in cleaning services. Employers will end up hiring fewer cleaners than there are in the economy as they have to pay them more. This will then cause structural unemployment.

Efficiency wages

Companies often choose to pay workers more than the minimum wage. They do this to provide workers with an incentive to deliver better performance in their jobs. This comes with many benefits for the firms as it contributes to an increase in productivity of the production process.

However, when you have many companies providing efficient wages, it will make those companies very attractive. This will increase the number of people seeking a job in one of these companies, but only a limited number of workers will be hired. This will then cause an increase in structural unemployment.

Structural Unemployment Graph

Figure 1 shows the structural unemployment graph using demand and supply for labor analysis.

Structural unemployment StudySmarter OriginalsFigure 1. Structural unemployment, StudySmarter Originals

The labor demand curve slopes downward, as indicated in Figure 1. above. It implies that when wages decline, businesses are more inclined to recruit new employees and vice versa. The labor supply curve is an upward sloping curve that indicates that more employees are willing to work when the pay increases.

The equilibrium occurs initially when the demand for labor and supply for labor intersect. In Figure 1., at the point of equilibrium, 300 workers are getting paid a $7 per hour wage. At this point, there is no unemployment as the number of jobs is equal to the number of people who were willing to work at this wage rate.

Now assume that the government decides to put a minimum wage of $10 per hour. At this wage rate, you will have many more people willing to supply their labor which will cause a movement along the supply curve, resulting in an increase in the quantity of labour supplied to 400. On the other hand, when companies have to pay $10 an hour to their workers, the quantity demanded will drop to 200. This will cause a surplus of labor = 200 (400-200), meaning more people are looking for jobs than there are job openings. All these additional people that can't be employed are now part of the structural unemployment.

Structural Unemployment Examples

One of the structural unemployment examples can be found in manufacturing industries. Think about a clothing manufacturing facility. The manufacturing facility has many unskilled laborers employed. Their job is to combine individual components into a finished product during clothes manufacturing. However, new technology is invented that can combine individual components into a finished product. It requires a small number of people to monitor the equipment. Some staff is hired to monitor and calibrate the equipment, but the remainder must decide whether to continue their study or look for work in a new field. After introducing specialized production assembly technology, product assembly employees at a clothes manufacturing facility became structurally unemployed.

Another example of structural unemployment could be in the fruit-picking market. New robots that are able to pick the fruits will replace fruit pickers. This will leave fruit pickers to be unemployed as their skills are no longer demanded. Additionally, they don’t have the skills needed to monitor the robots and help improve their algorithms. As a result, they will be unemployed.

Disadvantages of Structural Unemployment

There are many disadvantages of structural unemployment. Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing to work, but they cannot do so as they lack the necessary skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

Another disadvantage of structural unemployment is increased government spending on unemployment benefits programs. The government will have to spend more of its budget supporting those individuals who became structurally unemployed. This means that the government would have to use a large part of its budget on unemployment benefits programs. To fund this increased spending the government could potentially raise taxes which would create other consequences such as a decrease in consumer spending.

Theory of Structural Unemployment

The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills. This type of unemployment is harder for governments to fix as it would require a large portion of the labor market to be retrained. The theory of structural unemployment further suggests that this type of unemployment is likely to emerge when there are new technological advances.

Structural Unemployment - Key Takeaways

  • Structural unemployment occurs when there are individuals seeking a job, but are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.
  • The main causes of structural unemployment you should know of are: minimum wages, labor unions, and efficiency wages.
  • Manufacturing industries, and fruit-picking labor markets are examples of structural unemployment.
  • One of the main disadvantages of structural unemployment is creating inefficiencies in the economy.
  • The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills.

Frequently Asked Questions about Structural Unemployment

Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.

An example of structural unemployment is fruit-pickers being replaced as a result of a fruit-picking robot introduced.

Governments have to invest in retraining program for individuals who lack the skills necessary to meet the market demand.

The main causes of structural unemployment you should know of are: Minimum wages, labor unions, and efficiency wages.

Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing and ready to work, but they cannot do so as they lack the skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

Final Structural Unemployment Quiz

Question

When does unemployment occur?

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Answer

Unemployment occurs when an individual is looking for a job, but he/she cannot find one. 

Show question

Question

What is structural unemployment?

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Answer

Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.

Show question

Question

What's the difference between structural unemployment and other types of unemployment?

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Answer

Unlike other types of unemployment, such as frictional, structural unemployment is much more persistent and lasts for more extended periods. This type of unemployment has long-term consequences for the economy and can result from different factors.

Show question

Question

How do you know you are dealing with structural unemployment?

Show answer

Answer

Whenever you have more people seeking jobs than there are jobs in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with structural unemployment. 

Show question

Question

What are the factors that can lead to structural unemployment?

Show answer

Answer

There are many factors that could lead to structural unemployment. The main causes of structural unemployment you should know of are: minimum wages, labor unions, and efficiency wages.

Show question

Question

Explain how minimum wages lead to unemployment.

Show answer

Answer

In industries where there is a surplus of workers supplying their labor, companies would want to decrease their wages, but they can't really lower the wages due to the government's imposed minimum wage. In such a scenario, there are more people supplying their labor than there are companies demanding labor at the minimum wage rate. This will cause some people to secure jobs while others will remain unemployed.

Show question

Question

Explain how labor unions lead to structural unemployment.

Show answer

Answer

When labor unions manage to negotiate higher wages for a certain industry where they have workers, this will discourage employers from hiring more due to the cost they face in improving and meeting the demands of labor unions.

Show question

Question

Explain how efficiency wages lead to structural unemployment.

Show answer

Answer

When you have many companies providing efficient wages, it will make those companies very attractive. This will increase the number of people seeking a job in one of these companies, but only a limited number of workers will be hired. This will then cause an increase in structural unemployment.

Show question

Question

What does it mean for the labor supply to slope downwards?

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Answer

It implies that when wages decline, businesses are more inclined to recruit new employees and vice versa. 

Show question

Question

What are some examples of structural unemployment?

Show answer

Answer

Manufacturing industries, fruit-picking labor markets are examples of structural unemployment.

Show question

Question

How individuals become structurally unemployed in manufacturing facilities?

Show answer

Answer

The manufacturing facility has much unskilled labor employed. Their job is to combine individual components into a finished product during clothes manufacturing. However, new technology is invented that can combine individual components into a finished product. It requires a small number of people to monitor the equipment. Some staff is hired to monitor and calibrate equipment, but the remainder must decide whether to continue their study or look for work in a new field. After introducing specialized production assembly technology, product assembly employees at a clothes manufacturing facility became structurally unemployed.

Show question

Question

What happens to fruit-pickers when a fruit-picking robot is introduced?

Show answer

Answer

New robots that are able to pick the fruits will replace fruit-pickers. This will leave fruit pickers to be unemployed as their skills are no longer demanded. Additionally, they don’t have the skills needed to monitor the robots and help improve their algorithms. 

Show question

Question

What is the main disadvantage of structural unemployment?

Show answer

Answer

One of the main disadvantages of structural unemployment is creating inefficiencies in the economy.

Show question

Question

How does structural unemployment create inefficiencies in an economy?

Show answer

Answer

Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing and ready to work, but they cannot do so as they lack the skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

Show question

Question

What does the theory of structural unemployment suggest?

Show answer

Answer

The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills.

Show question

Question

Why structural unemployment is harder to fix?

Show answer

Answer

This type of unemployment is harder for governments to fix as it would require a large portion of the labor market to be retrained.

Show question

Question

Highlight the incorrect portion of the text

: Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don't have the skills required or the number of jobs opened in an economy is higher than the number of people looking for a job.

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Answer

Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don't have the skills required or the number of jobs opened in an economy is higher than the number of people looking for a job.

Show question

Question

Which of the following are true about structural unemployment?

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Answer

all of the above

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Question

Whenever you have more people seeking jobs than there are available in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with ------------------------------ -----------------------------------.


Show answer

Answer

structural unemployment 

Show question

Question

What are the causes of structural unemployment

Show answer

Answer

minimum wages, labor unions, and efficiency wages

Show question

Question

What is minimum wage?

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Answer

Minimum wages refer to the minimum amount a worker is allowed to be paid in exchange for the work provided.

Show question

Question

Which of the following is true?

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Answer

Labor unions are types of organizations formed by employees in a certain industry with the goal of increasing wages, benefits, and working conditions.

Show question

Question

Companies often choose to pay workers more than the minimum wage. They do this to provide workers with an incentive to deliver better performance in their jobs. The statement above applies to which causes of structural unemployment?


Show answer

Answer

Efficiency wages

Show question

Question

What are some disadvantages of structural unemployment?

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Answer

creates inefficiencies and increases government spending 

Show question

Question

The theory of structural unemployment suggests that: 


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Answer

this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills

Show question

Question

There are many reasons why a person can’t find a job. It could be that there are not enough job openings that fit their skills, or it could be that the job they can get is in another country, and they don’t feel comfortable moving. What type of unemployment will they be facing?


Show answer

Answer

structural unemployment

Show question

Question

Whenever you have more people seeking jobs than there are available in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with structural unemployment.

Show answer

Answer

TRUE

Show question

Question

The government imposes the ----------------------- --------------------------- wage which employers must follow.

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Answer

minimum wage

Show question

Question

What are labor unions?

Show answer

Answer

Labor unions are types of organizations formed by employees in a certain industry with the goal of increasing wages, benefits, and working conditions.

Show question

Question

Companies often choose to pay workers more than the minimum wage. They do this to provide workers with an incentive to deliver better performance in their jobs. The statement above applies to which cause of structural unemployment?


Show answer

Answer

Efficiency wages

Show question

Question

What is the labor supply curve?

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Answer

The labor supply curve is an upward sloping curve that indicates that more employees are willing to work when the pay increases.


Show question

Question

Why is increased government spending on unemployment benefits programs a disadvantage of structural unemployment?

Show answer

Answer

It is a disadvantage because the government will have to spend more of its budget supporting those individuals who became structurally unemployed. To fund this increased spending the government could potentially raise taxes.

Show question

Question

What is the theory of structural unemployment?

Show answer

Answer

The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills. In addition, it also suggests this type of unemployment is likely to emerge when there are new technological advances.

Show question

Question

One of the main disadvantages of structural unemployment is creating ------------------------------ in the economy.

Show answer

Answer

inefficiencies 

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