Structural Unemployment

Idea

Structural unemployment arises from a mismatch of skills: job-seekers cannot find work because the skills they hold do not match those employers now demand. Unlike demand-deficient unemployment, it persists even when total demand is adequate, because the problem is the composition of labour demand, not its level.

Mechanism

As an economy develops, the pattern of production shifts, and with it the skills employers want. Workers whose skills were tied to declining activities are displaced, and where those skills are non-transferable they cannot move readily into the growing parts of the economy. The result is a standing pool of workers unemployed despite vacancies elsewhere that they are not equipped to fill.

Considerations

Two common drivers:

• Technological advancement. Rising capital quality makes machines closer substitutes for labour, rendering some low-skill jobs obsolete; this variant is technological unemployment. Singapore’s move to driverless MRT trains, displacing train operators, is an example.

• Offshoring and outsourcing. As lower-cost economies such as China and India grow, multinationals relocate production abroad (offshoring) or contract parts of it out (outsourcing), displacing domestic low-skill workers whose skills do not transfer.

Because the cause is a skills mismatch, the remedies work on skills and the structure of the economy — retraining the workforce to match current labour demand, and restructuring the economy to open new industries that absorb workers from declining ones. The policy detail belongs to the macroeconomic-policy topic.