Structural Unemployment By Jane Galt

by John Hawkins | September 16, 2005 11:55 pm

Some of my readers have written in asking for a slightly fuller explanation of structural unemployment.

Did you ever watch Little House on the Prairie? I looooooved Little House on the Prairie. I love my parents and all, but let’s be frank: I wanted the Ingalls family to adopt me. To be honest, I dreamed about it.

If you did watch the show, you may remember that every so often Charles (the father of the Ingalls family) had to go off and work as a freight hauler, or on a railroad gang, because the crops had failed.

Anyway, what struck me recently–and I have no idea why this just struck me, because it’s fairly obvious–was that this used to be fairly common. A farm worker is also perfectly capable of sweeping cinders in a factory, or digging ditches at a construction site, or hauling sacks of flour from Point A to Point B.

As our economy has mechanized, of course, the relative demand for skilled labour has gone up, and the relative demand for unskilled labour has gone down. We all know that; it’s why we’re sitting in front of that nice shiny computer instead of walking behind a mule like Grandpa did.

Skill implies specificity. Some skills are general, like reading, but many more are very specific; knowing how to run a metal lathe doesn’t teach you very much about perming hair or setting a broken bone.

What that means is that when the industrial composition of our economy changes, because machines can do some jobs better than people (word processors instead of secretaries), because other countries can do some things better than we can (Chinese-manufactured electronics), or simply because some markets got overcrowded (telecoms and web retailers), it takes a lot longer for employment to adjust than it used to, because workers’ skills are very specific to their old industries or jobs. This sort of unemployment is known as “structural unemployment”, as opposed to “cyclical unemployment”, which happens when companies lay off workers they expect to rehire in the future as a result of temporary downturns in demand.

This has been, to my mind, the most convincing explanation offered so far as to why job creation has lagged in the current recovery. This is not quite a new phenomenon–remember the “jobless recovery” in the early Clinton years?–but as an explanation, it is resisted fiercely by those opposed to Bush, who would like to write off our nation’s lacklustre job creation to the ineptness of the current administration.

But it dovetails well with something else we know, which is that the returns to skilled labour have been increasing sharply since the 1970’s, while the returns to unskilled labour have fallen dramatically. Since unskilled or semiskilled labour is probably the easiest to move around (except for jobs pretty far up the professional tier–investment bankers moving into CFO jobs and so forth), the decline in demand for unskilled labour over the past thirty years or so has probably resulted in a labour market that is simply more rigid in times of change.

This content was used with permission of Asymmetrical Information[1]

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