Structural Unemployment – Labour Market ImpactSL
MacroeconomicsThis diagram illustrates structural unemployment in the labour market, shown by a leftward shift in the labour demand curve (ADL).
Curves and elements
- adl1
- ADL1: Initial demand for labour before structural change.
- adl2
- ADL2: New, lower demand for labour after structural change.
- asl
- ASL: Aggregate supply of labour, assumed unchanged in the short run.
- w1
- W1: Initial equilibrium wage before the shift in demand.
- w2
- W2: New, lower equilibrium wage after demand falls.
- e1
- E1: Original employment level before the structural shift.
- e2
- E2: New, lower employment level after the shift.
- unemployment
- Unemployment caused by the fall in demand, represented by the gap between E1 and E2.
Key explanations
- 1
Structural unemployment occurs when there is a mismatch between the skills workers have and the skills demanded by employers. It is often caused by technological change, automation, offshoring, or long-term industry decline.
- 2
Initially, the labour market equilibrium is at wage W1 and employment E1, where ADL1 intersects ASL.
- 3
A shift from ADL1 to ADL2 reflects a fall in demand for certain types of labour due to structural changes.
- 4
The new equilibrium is at wage W2 and lower employment E2.
- 5
The difference between E1 and E2 represents workers who are unemployed due to their skills no longer being in demand.
Example exam question
Using a labour market diagram, explain how structural unemployment may arise in an economy.
Show example answer
Structural unemployment is illustrated by a leftward shift in the labour demand curve from ADL1 to ADL2, representing a fall in demand for certain types of labour. The equilibrium wage falls from W1 to W2 and employment from E1 to E2. The gap (E1 − E2) reflects the workers who remain unemployed due to a skills mismatch.
