What is Structural Unemployment?

Structural unemployment is like a river changing course...

It might flow in the same path for decades. People might build houses along the bank and enjoy their riverfront property. But one day, there’s a massive rainfall, the river breaks through an oxbow, and charts a new path. All of a sudden, the river is structurally different than it was. People that once had riverfront property may not anymore.

As a society advances and technology progresses, the things that people do with their time and money also change. These evolving consumption patterns promote shifts in the economy, and the job market adapts. Businesses that once offered products that everyone needed are suddenly out of business. Consequently, the employees at those firms become unemployed workers.

There are several examples of this process playing out. We don’t have milkmen anymore. Nor do we have telephone operators, ice delivery drivers, buggy whip makers, blacksmiths, or door-to-door encyclopedia salesmen. While all of these jobs provided services of value at different times, they’re no longer relevant in our modern economy. Refrigeration, cellphones, automobiles, and the internet changed the demand for those professions.

On the other side of the story, those technological advances created new jobs. Many of the jobs that people do today weren’t imaginable in the past. This constant evolution of what we can do changes the structure of our lives — and our careers. When someone loses a job because the structure of the economy is changing, it’s called structural unemployment.

There are several jobs today that won’t exist in the future economy. This structural change is already evident in manufacturing jobs as automation takes over. And, just like the gas station attendant is not a job many of your friends have today, grocery store clerk positions are slowly losing ground to self-checkout stands. Similarly, Uber has caused a dramatic reduction in the number of taxi drivers. In the future, however, self-driving cars might replace Uber drivers. The structure of the economy is always changing, and displaced workers will always be a byproduct of that process.

Structural unemployment is caused by a mismatch between the available labor and the required labor. The single largest cause of structural unemployment is technological advancement. New innovations often cause disruptions in the way things are done.

The automobile improved personal travel but put horseshoe makers out of business. The internet made information easily accessible, but rendered the Yellow Pages obsolete. There are countless stories such as these. And in each case, a new technology revolutionized how we get through our days (usually in an improved way).

Another cause of structural unemployment is competition. In a capitalist society, businesses must compete for business. Usually, that means offering a product either at a lower price, a better quality, or both. This competition for consumers drives companies to find new processes that will allow them to reduce prices. But, these new processes can reduce the need for employees. And so, competition can cause structural unemployment.

One other cause of structural unemployment can be urbanization or relocation. In areas with large rural populations, or in economies that are more agrarian (farming) focused, there can be a disconnect between where people live and where jobs are located. Or, if an existing company moves its operations, it can leave several employees without work. If the new jobs exist in a place away from the available labor, and the people able to work are not able to relocate, it can lead to a structural problem in the economy.

Any of these causes of structural unemployment point to a coordination problem in the market. Over time, these types of problems tend to resolve themselves. However, the transition period can be painful, especially for individuals who can’t easily adapt to the new economic structure. A jobless coal miner can’t simply become a computer programmer overnight. And if they’ve been mining for a majority of their careers, it becomes that much harder to adjust.

These situations can result in a lot of people remaining unemployed, even if they’re willing to work and the economy has a lot of job openings. And so, the task of understanding the health of the economy can become much more challenging than simply looking at numbers like a high unemployment rate. It requires looking closely at the composition of the labor force.

There are four basic types of unemployment:

Structural unemployment is when a person loses their job because there’s a mismatch between the skills they have and the skills that are needed in the labor market. Structural unemployment can lead to long-term unemployment which can sometimes stretch decades for certain individuals.

Another issue is cyclical unemployment, caused by fluctuations in the business cycle. When the economy enters a recession, several jobs are lost. Those job losses aren’t caused by changes in the underlying economic structure. Instead, they’re from the natural cycle of expansion and contraction in any economic system. These jobs tend to come back as the economy recovers, implying that cyclical unemployment is short-term. However, cyclical unemployment can become structural if businesses find more efficient ways to run their operations. In those cases, the cyclical jobs that were lost don’t return when the economy begins to recover.

Frictional unemployment is the time a person spends between jobs after voluntarily leaving a position. This type of unemployment is usually short-term and typically ends with the person on an improved career path.

Seasonal unemployment is temporary unemployment caused by the nature of the job. For example, a mall Santa usually won’t find many available jobs in the summer. Construction jobs tend to peak in the summer, leaving workers seasonally unemployed in the wintertime. And school teachers have the opposite season, working through the fall, winter, and spring, then becoming seasonally unemployed while school is out for the summer.

While the Federal Reserve attempts to minimize cyclical unemployment by using monetary policy, addressing structural unemployment requires different tools. Reducing structural unemployment requires either slowing down changes to the economy or minimizing the amount of time that a person spends unemployed after their labor isn’t needed anymore.

Many people advocate for the former option, asking for government regulations over technology that could displace those jobs. Several years ago, you might have heard people protesting the use of automatic teller machines (ATMs). One common argument was that it would cause massive unemployment among bank tellers — an example of structural unemployment. It turned out that bank tellers and ATMs can coexist. The machines do the menial tasks while human tellers focus their efforts on solving more interesting problems and providing better customer service.

A similar debate is currently happening around grocery store clerks. In some places, government officials are even pushing to outlaw self-checkout stations. Much like the law in Oregon that prohibited people from pumping their own gas, these efforts are intended to protect jobs. However, these protectionist policies rarely work — especially when the new technology results in better outcomes, including lower prices and increased safety.

Many economists would point out that it is far better for the economy to focus on providing those structurally unemployed people with new job skills. The negative response to falling manufacturing and retail employment can only choke economic growth. It can be argued that it’s much better to allow progress to occur while managing the transition to the new economic structure. Retraining programs, vocational rehabilitation, and trades schools are all effective ways to reduce structural unemployment by turning job seekers into skilled workers.