WHAT IS STRUCTURAL UNEMPLOYMENT? EVALUATE THE MEASURES THE GOVERNMENTS MIGHT TAKE TO COMBAT IT.

MACROECONOMICS – WHAT IS STRUCTURAL UNEMPLOYMENT? EVALUATE THE MEASURES THE GOVERNMENTS MIGHT TAKE TO COMBAT IT.

Structural unemployment is a branch of natural unemployment. It occurs when there is a continuous fall in demand for a particular labour market, derived from a change in the economy’s structure (e.g. change in consumer’s taste, automation, low cost labour alternatives in foreign countries… etc.) The reason why this is ‘natural’ is because there will always be a certain amount of structural unemployed people for any given wage rate, as it is considered normal that new jobs are created, other jobs might disappear, leading in structural unemployment. If this wouldn’t be the case, this would mean that the economy, in which there is no structural unemployment, is not innovative. This doesn’t mean it is good though; structural unemployment is a big long-term issue, because the structural unemployed people are unlikely to find other jobs, due to their specific skills for their previous jobs, so they have the lack of occupational mobility to change jobs.

There are two main measures that can be taken: interventionist policies and market-oriented or free market policies. The biggest problem of the first type is that these policies are very expensive and will create high opportunity cost, meaning the government has less money to spend on other things. The biggest problem of the neo-liberalism policies is that they will increase inequality, meaning that the gap between the poor and the rich people will become bigger as well.

A potential interventionist policy would be subsidising the training of unemployed to meet the demand of the changing economy. For example due to changes in UK’s economy, a lot of mineworkers in Wales ended up without a job. The government could have trained them to meet the new demand, so they could have trained those mine workers to be IT men or so. The positive things about this are that ones people join these sorts of trainings, they will no longer count as unemployed, because they go back into education, and thus this will tackle frictional unemployment as well. Frictional unemployment is unemployed people that are able and willing to work, but gave up searching. By doing this, more people will be able to work, and therefore the supply of labour will be shifted outwards, which will reduce the gap between the LF (economically active) and people not willing or able to work. This is shown in fig. 1.

But it isn’t as simple as that. Often people who suffer from structural changes, left school from a fairly young age. Take for example the coal miners in Wales, in some villages, they have been coal miners for several generations, so those people might not be willing to practise another job. Another negative aspect is that this is extremely expensive, because it is an interventionist policy, as explained before.

A classic policy every government would consider is to reduce the unemployment benefits. This will diminish a lot of unemployment types, because it reduces the unemployment trap, which is a situation whereby the unemployed person earns the same amount of, or even more money by claiming benefits than they would if they had a low-skilled job. Imagine the only job available for an unemployed is cleaning toilets in a restaurant and the person gets paid 75 pounds a week, but by claiming benefits the person gets paid 71 pounds a week. The person will consider whether to keep cleaning toilets for those four extra pounds or claim benefits. So when benefits are cut, that person will carry on cleaning toilets. Reducing benefits will also encourage people to find a job, because they will be more willing to work. However interventionist politicians will argue this will increase the inequality between the poorest and the richest. Although liberalists believe that everyone will always find the means to get a job.
Fig. 2 shows the effect of the reduction of benefits on how many people will still be claiming benefits. W1 is the original wage an unemployed would get (the 71 pounds a week from the example above) and W2 shows the unemployment benefit after the reduction (let’s say 61 pounds). Because of this reduction, the unemployment trap will be reduced and the quantity of people claiming benefits will decrease, from Q1 to Q2.

To end it might work to give people money in order to make it more attractive for unemployed to move and work somewhere else. So for example if people living in Malham, which is a fairly rural place in the Northern England, struggle to find work in that area, because there are no jobs available, the government could give these people money, in order to encourage them to move to Leeds. This is a place where more jobs are available, and so it is more likely those people will find work. The policy will reduce geographical unemployment, which is a branch of structural unemployment and reduce frictional unemployment as well, because less people will be seeking jobs. It will eventually have the same effect on the diagram shown in fig. 1, meaning it will diminish the gap between aggregate labour supply and total workforce. This gap represents the natural unemployed people, and so when it diminishes, the amount of natural unemployed will be reduced.

But there is a negative side to this policy as well. When you start ‘taking away’ all economically active people in places like Malham, the area won’t be very productive: stores/restaurants/hotels will close, more people will abandon the place, business confidence will reduce, leading in a continuous movement downwards, until the place will eventually become a ghost-city. This is definitely not what the government want, because there will be a decrease in quantity of land, lost infrastructure, lost culture… etc. Therefore it might be more effective to encourage firms to settle in areas like Malham to create jobs, boost the economy and increase the quantity of land. I also think that this policy will be less expensive the government will only need to subsidise the firm.

It is clear that there is not just one solution that works, because tackling structural unemployment is way more complex than that. There are advantages and disadvantages to all the proposed policies, so it is probably best to find the right balance between them. If we are dealing with a changing economy, it is always good to provide subsidised training in order to meet the change in demand, but not too much though, because of the opportunity cost. When the unemployment benefits are too high, a slight reduction could be efficient to encourage people to get the available jobs, even when they don’t want to. But then there is the issue of whether this is fair and the possibility to an increase in inequality. Then the government could encourage firms to move to areas where jobs are needed, through subsidising them. People would say, opportunity cost will be created in this manner, but I think through employing people the government’s revenue will increase, because of the increase in taxpayers.

I feel through following the policies above, at least some of the structural unemployed people will find jobs, which will lead to a decrease in unemployment.