Home > Economic Policy, Economics, Economy, unemployment > What is structural unemployment?

What is structural unemployment?

From a very good post by Gavyn Davies (FT):

A separate question is whether this rise in long term unemployment has been translated into a rise in structural unemployment. These concepts are usually related in most countries, but that rule may not always apply, and the rule has not applied as much in the US as elsewhere. Structural unemployment is defined as the unemployment rate required to hold inflation constant in the medium-term. Long-term unemployment usually exerts less downward pressure on inflation than short-term unemployment, because the former group has less effect on wage bargaining than the latter group. Therefore, structural unemployment rises with the level of long term unemployment.

And he gives us this graph:

Subtracting structural unemployment from the unemployment rate gives us cyclical unemployment; the portion of unemployment that will be soaked by increased economic activity and growth:

Nevertheless, the key point is that this entire range is considerably lower than the actual level of unemployment, which means that on most measures there is a large amount of cyclical unemployment left in the economy today. This is the portion of unemployment which should be susceptible to government or central bank policy easing, since it can be reduced without raising the inflation rate. After that, supply-side action would be needed to get the rate down further.

These supply-side policies include:

  • Increased spending on education and training: in order to align unemployed worker’s skills with industries that need workers. However, there will be difficulty in training formerly low-skill workers (e.g. construction and manufacturing workers) to become high-skill, high-tech workers.
  • Benefit reform: Increases the incentives for unemployed workers to take jobs available even at lower wages.

However, it must be noted that long-term unemployment can become structural:

As Martin Wolf points out in his FT column this week, the clock is ticking. European experience in the 1980s and 1990s clearly suggests that long-term unemployment tends to leak more and more into structural unemployment as time passes, because these workers effectively become irrelevant to the active labour market. Therefore the problem of long-term unemployment may become increasingly intractable as time passes.

For more see this previous post.

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