IBonomicsStructural 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
- The initial demand for labour, before structural change.
- ADL2
- The new, lower demand for labour after structural change.
- ASL
- Aggregate supply of labour, assumed unchanged in the short run.
- W1
- The initial equilibrium wage, before the shift in demand.
- W2
- The new, lower equilibrium wage after demand falls.
- E1
- The original employment level, before the structural shift.
- E2
- The new, lower employment level after the shift.
- Unemployment
- Caused by the fall in demand, and 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.
