What this lesson teaches
I can explain the causes of weak growth, unemployment, and inflation or deflation.
Syllabus 8843, 3.2.2(a). Macroeconomic Issues: Macroeconomic issues and their causes; Undesirable economic growth - persistently low or negative, unsustainable, non-inclusive due to factors such as changes in AD or AS, environmental degradation, inequitable income distribution; Unemployment - demand-deficient, structural, frictional due to factors such as lack of AD, technological changes, mismatch of skills, transition between jobs; Price instability - demand-pull inflation, cost-push inflation, deflation due to factors such as changes in AD, costs of production, productive capacity
Make a guess
New software wipes out routine office jobs, while IT jobs go unfilled. Would more government spending fix this unemployment?
- No. Structural unemployment fixes itself once wages fall.
- Not much: the problem is a skills mismatch.
- Yes. More spending creates jobs, and the unemployed can take them.
Show the answer
Not much: the problem is a skills mismatch.
Extra spending creates demand, but the jobless still cannot do the IT jobs. Retraining targets the cause.
Structural unemployment happens when workers' skills or locations no longer match the jobs available.
Structural unemployment arises when the structure of the economy changes: new technology, changes in consumer tastes or competition from abroad reduce demand for some jobs and create others.
Workers in declining industries may lack the skills needed for the new jobs (occupational immobility). So unemployment and unfilled vacancies can exist side by side.
It can last a long time, because retraining takes time and older workers may find it harder to switch.
In Singapore, automation and AI are changing many jobs. SkillsFuture and career conversion programmes aim to help workers retrain.
- Cause
- Skills or location mismatch.
- Sign
- Unemployment alongside vacancies.
Worked example: New jobs, different skills
Firms adopt new software, so routine processing jobs disappear. At the same time, specialist IT maintenance jobs are created, but the displaced workers lack the certification.
- Vacancies exist, but the unemployed cannot fill them.
- This is structural unemployment: a mismatch of skills.
- More spending (higher AD) would not solve it.
- Retraining, or hiring for potential with on-the-job training, would help.
Watch out for this
If there are vacancies, there should be no unemployment.
If the unemployed lack the skills or live too far away, vacancies and unemployment can exist together.
Check your understanding
Which policy best targets structural unemployment?
- Retraining programmes for displaced workers.
- Higher unemployment benefits, so workers can afford to search longer.
- A cut in interest rates to raise spending.
Show the answer
Retraining programmes for displaced workers.
Right. They reduce the skills mismatch.