Chapter 10 · Macroeconomic objectives I: Low unemployment, low and stable rate of inflation
Structural unemployment: falling labour demand
Show how falling demand for particular skills can create structural unemployment. Explain the role of wage rigidity and labour-market mismatch.
The economic idea
Unemployment exists when people who are without work, available for work and actively seeking work cannot find employment. It is measured as a percentage of the labour force, not of the entire population.
Structural unemployment is unemployment caused by a mismatch between workers and available jobs. The mismatch may involve skills, qualifications, occupation, technology or geographical location, and often follows lasting changes in the structure of production.
Demand for labour is derived demand: firms hire workers because labour contributes to producing goods and services consumers want. Automation, changing consumer tastes, trade or the decline of an industry can therefore reduce demand for a particular type of labour.
If occupational retraining or migration takes time, or if wages are slow to adjust, workers displaced from one activity may remain unemployed while firms elsewhere report vacancies. Structural unemployment can therefore coexist with an expanding economy.
Reading the labour-demand change from D₁ to D₂
“Price of labour (wage)” is the price of labour and “Quantity of labour” is the quantity of labour.
“D₂” slopes downward because firms generally demand fewer worker-hours at a higher real wage, while “Supply of labour” slopes upward because more labour is offered as the real wage rises.
“Qd” marks employment demanded and “Qs” marks labour supplied at “W”. The difference is a quantity of labour, not an unemployment rate.
Starting schedule: D₁
“D₁” represents employers’ original demand for this kind of labour. Its intersection with “Supply of labour” identifies the original market-clearing combination before the structural change.
Structural change: D₁ to D₂
“D₂” lies to the left of “D₁”, so demand for this type of labour has decreased. With the real wage held at “W”, labour demanded is “Qd” while labour supplied is “Qs”; the gap “Qs − Qd” is unemployment.
Why the wage line matters
“Rigid wage” shows that the real wage has not yet adjusted to clear the changed market. At that wage, the gap between “Qs” and “Qd” persists. Even if wages fall, retraining and relocation may still be required because structural unemployment is fundamentally a matching problem.
A vacancy elsewhere is not automatically a solution
A fall in demand for workers in one industry can leave people with skills or locations that do not match the jobs available elsewhere. The problem is the mismatch, rather than simply a shortage of total spending.
Connect a proposed policy to that mismatch: retraining may improve skills, while better transport or relocation support may improve geographical mobility. Explain the time, cost or access barrier that could limit the response.
From structural change to unemployment
A lasting change in technology, trade or product demand changes derived demand from “D₁” to “D₂”.
At the unchanged “W”, employers reduce labour demanded to “Qd”.
Workers offering labour are shown at “Qs” on “Supply of labour”.
Common mistakes to avoid
- Structural unemployment is not the same as cyclical unemployment caused by deficient aggregate demand.
- A fall from “D₁” to “D₂” is a shift of labour demand, not a movement along one curve.
- A lower wage cannot by itself give workers the skills or location required by new vacancies.
- The gap “Qs − Qd” is a quantity of labour, not a percentage unemployment rate.
How to draw this diagram
- Title the diagram “Structural unemployment: falling labour demand”. Label the horizontal axis “Quantity of labour” and the vertical axis “Price of labour (wage)”.
- Draw D₁ first and label it clearly.
- Draw D₂ next and label it clearly.
- Draw Supply of labour next and label it clearly.
- Draw Rigid wage next and label it clearly.
- Mark each relevant intersection and distinguish the initial, market and socially optimum or policy outcomes where applicable.
- Project important intersections to the axes with dashed guide lines and label the outcomes.
- Check that every symbol used in the explanation appears on the diagram and add arrows showing the direction of change.
Assumptions and limitations
- The diagram treats labour as homogeneous even though structural unemployment arises from differences among workers and jobs.
- It does not show simultaneous vacancies, regional immobility, retraining time or labour-force exit.
- The rigid wage line isolates one source of persistence; wage flexibility does not eliminate every mismatch.
- The model is partial equilibrium and does not show economy-wide output, inflation or fiscal effects.