Government and the Macro‑economy: Employment and Unemployment
Focus: Structural Unemployment
Structural unemployment occurs when there is a mismatch between the skills that workers possess and the skills demanded by employers, or when workers are located far from where jobs are available. It is not caused by a short‑term fall in aggregate demand, but by longer‑term changes in the structure of the economy.
Key Characteristics
Long‑run in nature – can persist even when the economy is at full employment.
Related to changes in technology, consumer preferences, and global competition.
Often affects specific sectors (e.g., coal mining, traditional manufacturing).
Workers may need retraining, relocation, or a change of occupation.
Causes of Structural Unemployment
Technological Change – Automation and new production methods render certain skills obsolete.
Changes in Consumer Demand – Shifts toward services or greener products reduce demand for older industries.
Globalisation – Import competition can shrink domestic industries, leading to job losses in those sectors.
Geographical Mismatch – Jobs are created in regions where the unemployed do not live, and mobility is limited.
Education and Training Gaps – Education systems may not supply the skills needed by modern employers.
Measuring Unemployment
The unemployment rate (\$U\$) is calculated as:
\$U = \frac{U_n}{L} \times 100\$
where \$U_n\$ is the number of unemployed people and \$L\$ is the total labour force.
Comparison with Other Types of Unemployment
Type of Unemployment
Primary Cause
Typical Duration
Policy Response
Frictional
Job search and transition between jobs
Short‑term (weeks–months)
Improved job‑matching services, better information
Cyclical
Insufficient aggregate demand
Varies with the business cycle
Fiscal and monetary stimulus
Structural
Skill or geographic mismatches, technological change
Education and Training – Vocational courses, apprenticeships, and lifelong learning schemes.
Labour Market Flexibility – Reducing barriers to occupational mobility.
Regional Development – Infrastructure investment in lagging areas, incentives for firms to locate outside major hubs.
Support for Innovation – Grants for research and development to create new industries and job types.
Active Labour Market Policies (ALMPs) – Job‑search assistance, subsidised employment, and career counselling.
Suggested diagram: Supply‑and‑Demand model of the labour market showing a leftward shift of the labour‑demand curve (D₁ to D₂) due to technological change, resulting in a new equilibrium with higher structural unemployment.
Key Points to Remember
Structural unemployment reflects a fundamental change in the economy’s structure.
It persists even when overall demand is strong.
Government intervention focuses on improving the match between workers’ skills and job requirements.
Long‑term solutions involve education, training, and regional development.