The labor market has the unenviable task of not only absorbing the additional workers entering the labor force each year (as a result of population growth) but also dealing with the unemployed workers as economies. The Keynesian view of unemployment is due to lack of aggregate demand while the neoclassical view is that when prices and wages adjust unemployment will come down significantly. In more and more developing countries, long-term unemployment (workers unemployed for over six months) is spilling over into structural unemployment, which the ILO in its several publications underscores as the mismatch between the skills of the unemployed and the demand for skills in the labor markets.
This structural unemployment may arise due to automation in the work place (e.g. need for higher and higher computer skills), rigidities in the labor market, such as high costs of training or in the case of US de-industrialization as manufacturing jobs are continuously lost to
“The China wage”. The immobility of workers to move to areas where the jobs are available due to the costs of selling their houses and relocating or moving away from good school districts is also given as a cause for high structural unemployment in case of the US and the UK. Gender discrimination or other prejudices could also keep unemployment high. Advances in technology may also result in rapid increases in labor productivity which is likely to reduce the number of workers needed.
Some economists theorize that that persistent structural unemployment arising from inadequate aggregate demand for long periods of time exhibits path dependence or hysteresis, and this problem can be dealt with by fiscal stimulus and expansionary monetary policy. But, lack of aggregate demand does not appear to be a problem in fast-growing South and East Asian countries, which still have high levels of structural unemployment. So both demand and supply side policies are needed to deal with structural unemployment problems.
More recently Nobel Laureate Edmund Phelps points to the credit crunch during the global crisis as a factor in rising structural unemployment. His reasoning is that there has been a significant decline in venture capital funding and this could have deterred firms from undertaking investment and innovation. Uncertainty about the future would negatively affect large investment by companies. Phelps also mentions that Singapore’s tax credits to companies employing low-wage workers helped keep unemployment to a low level of 3 percent.
Other structural issues such as loss of jobs in the financial and manufacturing sector also need to be addressed. One challenge that keeps coming up is whether the future of industrialization is one of joblessness? In the USA and in several developing countries, small and medium enterprises generate most of the jobs. In a number of developing countries, where basic infrastructure services of water, electricity, road, etc are not adequately provided by the government, the entrepreneurs go into the shadows and operate in the informal sector. As a result, we observe informal sector output and employment accounting for 30-50 percent of GDP and total employment in several developing countries. In case of South Asia the size of informal employment could be even higher. Bottom line is that it is easy for an economy to shed jobs but takes a decade or more after each shock to create enough jobs and bring the employment to pre-crisis levels. This also means that an economy should take jobs from which ever sector they come from – manufacturing, services or agriculture.