So in my previous post, Classical Vs. Keynesian Assumptions: An Introduction, I talked about how the Classical and Keynesian schools of macroeconomic thought differ in terms of basic assumptions.
One of these critical assumptions is the assumption of “Full Employment”. But before we dissect full employment, I want to talk about “Structural Unemployment”. Why I’m doing this will become clear as you the read the next couple of posts.
Structural Unemployment is the type of unemployment that occurs when there is a gap/ mismatch/ incompatibility between the skills required for the available jobs and the skillset of the unemployed.
Structural Unemployment is not what we call Demand side unemployment or Cyclical unemployment, because it doesn’t occur due to a lack of aggregate demand in the economy. For instance, the high unemployment rates (8-10%) witnessed in the US during the 2007-09 recession were primarily due to a deficiency in demand and not due to structural causes. People cut spending when their home values crashed and/or they were laid off and demand dropped sharply. This led to further lay-offs and so on.
Structural Unemployment is a type of Supply side unemployment which means that it occurs due to changes on the supply side of the economy. More specifically, due to the fact that the skillset of the unemployed (the supply of labour) doesn’t fulfill the skill requirement for the available jobs (the demand for labour). So even though there are jobs, the unemployed are unable to get them.
Let's use a couple of examples to clarify this concept.
Move towards Online Retailing - an Example from India
A strong move towards Online Retailing is happening in India. Rapid revenue growth for online marketplaces such as Flipkart (grew revenues ~3x between FY13 and FY15) and Amazon India (revs grew 6x y-y to ~Rs 1,000 crore in FY15) is testament to this fact.
This is a structural change in the economy. The supply of goods and even services is increasingly being provided online as this cuts down costs for the providers and also allows them to access a geographically diverse set of customers. Brick and mortar stores/showrooms are being trimmed. As a result, sales and other staff employed by these (offline) outlets is being retrenched. The unemployment faced by these retail workers is “structural”.
In order to be absorbed into the new online retail format, this workforce will have to acquire different skills/be retrained. For instance, they may need to improve their English communication abilities so that they can work in the call centres run by the new e-commerce firms. Alternatively, they may need to acquire the IT skills needed to manage the online infrastructure of these firms.
Loss of American Manufacturing Jobs - the Poster Child Example for Structural Unemployment
So this example is hard to escape when one starts talking about Structural Unemployment, thanks to the Trump election propaganda regarding manufacturing, China and NAFTA.
It is true that manufacturing jobs in America have fallen over the decades. From ~20M jobs in 1980, they’ve fallen to ~12M today. Trump has blamed this on China and Trade agreements such as NAFTA. It’s true that the relocation of manufacturing plants to low-cost locations such as China, Mexico, Indonesia etc. has cost America jobs, but where Trump is wrong is when he forgets to talk about automation/technology which shares significant blame for the loss of jobs in manufacturing.
Also, Trade agreements such as NAFTA have hurt some workers for sure, but the growth in cheaper imports from Mexico would have happened anyway whether NAFTA was signed or not. Why? Because the movement of factories to low-cost locations such as Mexico is an unstoppable structural change that was bound to happen, irrespective of NAFTA.
These unemployed manufacturing workers in America were/are a poster child example of the “structurally unemployed”. To be absorbed back into the workforce, many have had to retrain themselves in other disciplines.
(For those interested in reading more about why Trump is wrong about NAFTA, please read my post by the same name, Why Trump is Wrong About NAFTA ;)
Technology is the main Driver of Structural Unemployment across the Globe - a Look at the Indian IT Industry
Technology is the largest killer of jobs globally. Machines/computers have reduced/eliminated the need for human intervention in many production and service oriented processes. While the ways in which technology kills jobs in manufacturing, retail and service industries are obvious, I want to talk about the much-discussed, technology-driven job losses happening in the Indian IT industry and how these are leading to structural unemployment.
Majority of the workforce employed in the IT industry in India does jobs that can be automated. Infact, global customers have started using technologies such as artificial intelligence and big data analytics to elimated the need for IT workers.
For illustration, lets take the job of an IT worker in India (working for a foreign client) which mainly involves maintaining software by plugging in simple code. This job can be be easily automated. This is where what we call Artificial Intelligence (AI) technology is being used. AI essentially just means using technology to do jobs that humans usually do. So automating software maintenance using AI would mean creating a software that fixes code for legacy software (i.e. software that the client is using). This software would do what the IT worker was doing before - find problems (bugs) in the legacy software that the client is using and make small changes to the code of the legacy software to fix these problems.
Gartner estimates that ~70% of Indian IT jobs in the outsourced business will be eliminated as automation increases. The layoffs are already happening. These workers are experiencing/will experience Structural Unemployment. They will have to retrain themselves in new technologies such as AI, machine learning and big data analytics if they are to find suitable employment.
Finally, as we discussed earlier in this post, besides technology, free trade and movement to low-cost geographies has also led to Structural Unemployment in many nations.
I think we've talked enough about Structural Unemployment. It's time to move on to “Full Employment”. Read about it in my following post What is Full Employment and why it is tricky to Estimate.
No comments:
Post a Comment