Causes/types of unemployment: structural unemployment

Government and the Macro‑economy: Employment and Unemployment

1. The Four Types of Unemployment (Cambridge IGCSE 0455 4.6)

2. Structural Unemployment in Detail

2.1 Definition

Structural unemployment occurs when a fundamental mismatch exists between the skills, experience or location of workers and the requirements of the jobs that are available. It is not caused by a temporary fall in aggregate demand; instead it reflects longer‑term changes in the structure of the economy.

2.2 Key Characteristics

• Long‑run nature: Can remain even when the economy is operating at full‑employment output.
• Sectoral or regional concentration: Often clustered in specific industries (e.g., coal mining, traditional textiles) or areas.
• Requires adjustment: Workers need retraining, relocation or a change of occupation to become employable.
• Linked to supply‑side change: Technological progress, changing consumer preferences and global competition drive the mismatch.

2.3 Main Causes (with brief examples)

1. Technological change – Automation and new production methods make certain skills obsolete (e.g., robot‑assisted assembly lines replace manual welders).
2. Changes in consumer demand – A shift from physical media to streaming services reduces jobs in DVD manufacturing.
3. Globalisation – Cheap imports of textiles lead to factory closures in high‑wage countries.
4. Geographical mismatch – New tech hubs develop in coastal cities while many unemployed workers remain in inland regions with limited transport links.
5. Education & training gaps – The education system does not provide enough graduates with data‑science or renewable‑energy skills.

2.4 Measuring Unemployment (AO1)

The unemployment rate (\(U\)) is calculated from the data collected in a labour‑force survey as:

\[

U = \frac{\text{Number of unemployed }(U_n)}{\text{Labour force }(L)} \times 100

\]

• Numerator (\(U_n\)): people who are without work, are available to start work, and have been actively looking for a job in the past four weeks.
• Denominator (\(L\)): total labour force = employed + unemployed.

Sample calculation (AO2 practice)

Unemployment rate = \(\frac{2\,\text{million}}{20\,\text{million}} \times 100 = 10\%.\)

2.5 Diagram Guidance (AO2)

• Draw a standard labour‑market diagram with the vertical axis “Wage rate (W)” and the horizontal axis “Labour (L)”.
• Show an initial labour‑demand curve \(D1\) and a labour‑supply curve \(S\). Their intersection is the initial equilibrium \((W1, L_1)\).
• Illustrate a left‑ward shift of labour‑demand to \(D_2\) (e.g., due to automation or off‑shoring). The supply curve remains unchanged.
• Mark the new equilibrium \((W2, L2)\). The horizontal distance between \(L1\) and \(L2\) represents the increase in structural unemployment.
• Shade the excess labour and label it “Structural unemployment”.
• Explain that the shift is not caused by a fall in aggregate demand; therefore the economy can still be at full‑employment output while the unemployment rate rises.

2.6 Policy Measures to Reduce Structural Unemployment (AO3 – evaluation prompts)

1. Education & Training

   • Vocational courses, apprenticeships, lifelong‑learning schemes, and university‑industry partnerships.
   • Evaluation: Improves the skill match in the long run, but programmes are costly and benefits may take several years to materialise. Their success depends on accurate forecasting of future skill needs.

2. Labour‑Market Flexibility

   • Relax occupational licensing, promote part‑time/contract work, simplify hiring and redundancy procedures.
   • Evaluation: Speeds up labour reallocation, yet can reduce job security and depress wages for low‑skill workers.

3. Regional Development

   • Infrastructure investment (transport, broadband), tax incentives for firms to locate outside major hubs, support for local entrepreneurship.
   • Evaluation: Tackles geographic mismatch, but projects often have long lead‑times and risk becoming “white‑elephant” investments if demand is over‑estimated.

4. Support for Innovation

   • R&D grants, start‑up incubators, subsidies for emerging sectors (e.g., renewable energy, AI).
   • Evaluation: Generates new job types and can stimulate economic diversification, yet success is uncertain and benefits may accrue mainly to already‑advanced firms.

5. Active Labour‑Market Policies (ALMPs)

   • Job‑search assistance, subsidised employment schemes, career counselling, wage subsidies for hiring the long‑term unemployed.
   • Evaluation: Provides short‑run relief and improves matching efficiency, but can be expensive and may create dependency if not time‑limited.

3. Links to Macro‑economic Aims and Other Policy Areas

• Full‑employment aim: Structural unemployment raises the natural rate of unemployment, making the full‑employment target harder to achieve even when aggregate demand is strong.
• Fiscal policy interaction: Government spending on education, training and regional infrastructure directly tackles the root causes of structural unemployment.
• Monetary policy interaction: While lower interest rates primarily target cyclical unemployment, cheaper borrowing can encourage firms to invest in new technologies and training, indirectly supporting structural adjustment.
• Supply‑side policy: Structural reforms (e.g., deregulation, tax incentives for R&D, flexible labour markets) are classified as supply‑side measures aimed at improving the productive capacity of the economy and reducing long‑run unemployment.

4. Key Points to Remember for Exams

• Structural unemployment reflects a fundamental change in the economy’s structure, not a temporary fall in demand.
• It can coexist with a booming economy and therefore threatens the full‑employment target.
• Government action focuses on improving the match between workers’ skills/locations and the needs of employers.
• Long‑term solutions involve:

  • Education and training programmes
  • Regional development and infrastructure
  • Labour‑market flexibility
  • Support for innovation and new industries
  • Active labour‑market policies

• When answering exam questions, always:

  • Define structural unemployment (one sentence).
  • Identify its main causes and typical duration.
  • Show a correctly labelled labour‑market diagram if required.
  • Calculate the unemployment rate from supplied data.
  • Discuss at least two policy measures, evaluating advantages, disadvantages and any uncertainties.