Structural Unemployment is a Problem

By Teodor Teofilov

Automation and artificial intelligence (AI) technologies are developing at an ever-increasing rate, and it has lead many people to worry about their future work. Especially in the manufacturing industry, workers are progressively substituted by robots that never get tired and are more precise and efficient.

Many worry about what will happen to millions of workers, how they will provide for their families and how will society adapt?

The majority of economists agree that there isn’t any need to worry. Past major transformations of the workforce and job requirements, especially the Industrial Revolution, didn’t lead to widespread suffering or social upheaval.

“Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment,” wrote Kenneth Rogoff, a professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, for the Project Syndicate. “Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment. By and large, that prediction has proven to be correct.”

With globalization and automation boosting corporate productivity, people might be worried about being replaced by AIs that are faster, better and require no sleep. The technological advancement of the human race in the past two decades has led to a lot of previously human operated jobs to disappear. Farms, which used to require dozens of people to work them, now can be maintained by one person.

There is, however, one problem that stems from technological development – people may lose their jobs and lack the qualifications to find another. Low qualification employment is being replaced by robots and in order for countries to fight the upcoming unemployment spike, which will come the more we integrate AI and automation in jobs, they need to address the issue of structural unemployment.

Currently, France has 9 percent structural unemployment and Spain has a staggering 16 percent. In 2015, the United States and the United Kingdom had a level of structural unemployment of 4.6 percent and 6.1 percent respectively.

Wait! What is structural unemployment?

Structural unemployment is a much longer lasting form of unemployment that is the direct consequence of shifts in the economy and is aggravated by factors like technology, competition, and government policies. It happens for a number of reasons – the workers’ lack of skills required for jobs, or workers living far away and unable to move closer to the regions where jobs are available. There are jobs that are available but the need of companies and what the workers offer differ vastly.

Structural unemployment in plain terms explains the disparity between the skills of out-of-work individuals and the available jobs. Technological change is one of the main culprits, as when new technologies are introduced it can make jobs obsolete as machines automate the process. For example, ticket machines at stations reduce the need for ticket officers, the internet has decreased the need for travel agents, online shopping has made retail staff redundant and much more.

Once the demand for older technologies is replaced by newer ones, people can become structurally unemployed. The computer, for instance, made the typewriter obsolete and many workers involved in the production of typewriters had to search for new employment.

There are two other types of unemployment that happen in a country’s economy.

The first is frictional unemployment, which happens when workers are searching for new employment or transitioning from old jobs to new ones. It can be considered voluntary unemployment as workers choose to remain unemployed instead of taking the first job offered.

It is usually present in economic systems because there are always people searching for new jobs. For example, recent college graduates are actively searching for jobs in their degree areas and aren’t likely to find them within a year because of a lack of experience. They get offered jobs in other fields but reject them as they aren’t what the graduate is looking for.

The second is cyclical unemployment. As time passes, the economy of a country experiences a lot of ups and downs, and this is what is called cyclical unemployment, as it comes in cycles. It occurs with these cycles and when the economy enters a recession, many people are laid off and they are considered as cyclical. For example, unemployment rates surged as high as 25 percent during the Great Depression, meaning that one in four were willing and able to work, but unable to secure a job. Most of this was cyclical unemployment, which eventually came down again.

The biggest difference between these two types of unemployment and structural unemployment is time. Structural unemployment is a long-term problem that has multiple causes, such as the inability of companies to provide people with jobs that fit their skills.

With technological advances in industries throughout the economy, companies need to hire workers with technical skills like programming or mathematical skills, to continue growing. However, individuals without these skills can become marginalized and experience structural unemployment as there is a mismatch between the needs of the market and what the workers offer.

Hmm. How damaging can it be?

Photo by Echo Grid on Unsplash

Structural unemployment can cause major problems for a country’s economy. Changing from old jobs to newer ones that require higher qualifications is a drawn out, expensive and often chaotic process both socially and economically.

If there is a big part of the population of a country that is structurally unemployed, it might mean that the workers will need to be completely retrained and acquire new skills in order to match the need of the new technologies and businesses. This is a long process as the older the population gets, the more set in its habits it is. Even with the existence of training programs, there are people that will end up unemployed for a long period of time.

It also tends to affect some regions more than others. For example, automation and international competition have killed jobs in manufacturing in the American Midwest and the North of England. A large part of these jobs has been replaced in economies that are booming in locations such as California, Texas or London. These three comprise a population of about 76 million. The disruption of manufacturing jobs by automation has forced people to relocate looking for new opportunities, which disrupts communities and costs a lot of money.

There are a few other problems that structural unemployment causes, according to economists. The first is called hysteresis, which refers to an event in a country’s economy that persists in the future, even if the factors that caused the event no longer exists.

The idea in structural unemployment is that high rates of unemployment will make future rates higher because workers that have been without a job for a long time become less employable, even if they have acquired new qualifications and skills.

Another problem is that there will be a decline in the participation rate. Workers can become discouraged and unmotivated, and more likely to suffer health problems. As such people may leave the labor market by retiring early or being classified as long-term sick, meaning that these individuals no longer are counted as unemployed.

Instead, they are a loss to the labor force and become recipients of government aid such as health care and welfare benefits. As unemployment is associated with a variety of costs from economic to personal health issues. Long-term unemployment can lead to alienation.

Technological advancement and automation have had dire effects on some industries. Structural unemployment can lead to the existence of ghost towns as people move away in search of better employment and new opportunities. For example, the car industry in Detroit and the structural unemployment led to the decline of the city’s population from 2 million to 900,000 people. It is usually the most skilled and mobile part of the labor force that is first to leave, leaving a variety of problems.

Sounds bad. How can we fix this?

Photo by Alex Knight on Unsplash

In the long run, economies traditionally recover. The huge technological changes that the Industrial Revolution brought didn’t leave the world’s economy riddled with unemployment. It pushed the world economy to prosperity and paved the way for our contemporary society. The overall unemployment rate hasn’t drastically increased since machines began stealing our jobs in the 1700s.

Over time new jobs pop up to replace the old. These jobs are often directly related to the technology that caused the structural unemployment. Economists have even argued that this type of unemployment can strengthen the economy in the long run as it makes the workforce more skilled.

The technological advancement that has caused the loss of jobs means that the new employment opportunities created by it should be more efficient and productive than the previous ones. However, more efficiency means only that we can produce more and not everyone agrees that is what we should be trying to do as a society.

There are numerous policies that can be implemented to overcome the problem of structural unemployment. Education and training of the workforce can help, but they need to be tailored to skills and qualifications that will enable the unemployed to find jobs in new industries. The government could pay for these training schemes focusing on skills that are in short supply, such as plumbing, electrician, and nursing or toward higher level jobs like a data protection specialist.

In a free market economy, companies can be unwilling to provide sufficient training because the of free rider problem – workers that benefited from a training scheme can go and work for other competitors. However, if the government subsidizes the business it can help overcome this market failure.

There are problems with this as there could be a failure on the government side. A governmental department could be slow to respond to the shifting market preferences and subsidize the wrong training scheme, or one that isn’t needed by employers. Another issue is that there might be a lack of confidence or willingness on part of the unemployed to take on new training schemes because they aren’t sure of the benefits, meaning that such operations may suffer from a low intake rate.

Because structural unemployment can be caused by the simple problem of the jobs being available at a different location, the government could offer housing benefits for the unemployed to help them move towards the expensive high employment areas. However, this can be very costly and it will be difficult to know who needs such a subsidy and for how long. One solution could be for the government to build housing in expensive areas.

Rather than encourage the labor force to relocate, the government could offer incentives for businesses to relocate to heavily depressed areas. A good example is the $4 billion in tax incentives that the state of Wisconsin offered to Taiwanese electronics manufacturer Foxconn last year. The company has promised to hire up to 13,000 people and place its North American corporate headquarters in Milwaukee.

There is, however, a limit on how many jobs you can relocate as employers are likely to be reluctant to move out of metropolitan cities such as London and New York to struggling areas like the U.S. rust belt.

Tackling structured unemployment needs to be done by improving market flexibility, free-market economists have argued. Allowing part-time work would provide the unemployed with new opportunities, but such jobs are insecure and often less paid and can lead to under-employment.

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Posted by Perfectly Plain

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