Structural unemployment can be defined as unemployment that exists as a result of rigidities in the labor market, such as a fall in the demand for a particular type of labor. There are three common causes of structural unemployment. First, new technologies push certain types of labor into irrelevancy. Many of the major technological advancements of the 21st century have centered around automation, which by its very nature reduces the need for human labor. Additionally, another prevalent occurrence that results in structural unemployment is the presence of lower-cost labor in developing nations.
The principal priority of firms is to maximize profits, and this often includes shipping labor – sometimes entire factories – to foreign countries where the labor market is significantly cheaper. When these jobs leave, it usually means that they’re leaving for good. Finally, changes in consumer taste may lead to a decreased demand for certain types of labor. For example, in 1979, a nuclear power plant in Pennsylvania had a partial meltdown, and it was considered to be the most significant nuclear accident in U.S. history. As a result, nuclear power lost its momentum, and jobs in nuclear engineering were scarce for decades. Ultimately, structural unemployment is most likely to occur in the face of technological advancements, the exportation of labor to developing countries, and changing consumer tastes.
As described above, there are countless circumstances that would be conducive to structural unemployment. For example, Figure 1 below illustrates a scenario in which pharmaceuticals, one of Ireland’s largest exports, has been outsourced to India. Given that the cost of employing labor is higher in more industrialized nations such as Ireland when compared to developing nations like India, labor demand in Ireland will fall. The consequence of this is that there are fewer pharmaceutical workers employed, (Q? to Q?) and wages (W? to W?) fall significantly. From this diagram we can assume (ceteris paribus) that unless these workers manage to find other jobs, there is an increase in unemployment. In order to ensure that unemployed workers can find new work and do not become structurally unemployed, the government can begin preventative initiatives through education and training, which would alleviate the effects of the diagram shown above.
This interventionist approach is the best way to go about reducing structural unemployment. It is regarded by economists as the most devastating form of equilibrium unemployment because it results from extensive changes to the structure of the economy itself; and very rarely do economies move backward. Therefore, it is understood that when structural unemployment is present, the labor force will be forced to adapt to the shifting market climate. In order to do this, more radical change is needed than just allowing the free market to regulate itself, and interventionist policies must be implemented. One of the best long term solutions involves an education system in which people are encouraged to be more occupationally flexible.
There must be a structural change to solve a structural problem. Evidence suggests that people in developed countries like Ireland will most likely change jobs multiple times throughout the course of their career. Therefore, it is apparent that a well-developed and diverse education system would allow individuals to acquire the necessary skills to adapt to rapid shifts in the market climate. For example, studies comparing the German and American education systems have shown that the German model gives students the potential for more occupational mobility due to their use of “tracking” and placing them in a level of education that best suits their needs and talents, while giving them a broad understanding of the general field they will be entering, so students who are bound for more of a vocational education will gain knowledge in various different trades. Models that are adhered to in countries like the United States allow for people to specialize in what interests them and pick up a set of particular skills, but it makes the labor force at large more susceptible to falling into structural unemployment as the market develops and changes.
Similarly, the next strategy to best improve occupational mobility would also involve a structural change in education and career development: retraining. This would require a spending initiative to promote and facilitate adult retraining programs. Doing so would assist in acquiring the necessary skills to match with available jobs in growing markets. For example, the United States’ Workforce Investment Act of 1998 is a good starting point for the more extensive type of program that would be required to limit widespread structural unemployment. The program is designed to link workers to job opportunities in their communities after providing support and retraining services in order to achieve meaningful employment. Ultimately, the use of education and retraining can be highly effective at reducing structural unemployment.