KALDOR-HICKS IMPROVEMENT: Based on the Kaldor-Hicks efficiency criterion, the notion that an action improves efficiency if the willingness to pay of those benefiting exceed the willingness to accept of those harmed. In other words, if those gains exceed those losses, or the benefits exceed the costs, then social welfare is improved and undertaking the action provides a net benefit to society. In other words, the winners can, in principle, compensate the losers for their loss, and still come out ahead. The actual compensation, however, is required. A contrasting condition for attaining efficiency is the Pareto improvement.
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Unemployment caused by a mismatch between workers' skills and the skills needed for available jobs. Structural unemployment essentially occurs because resources, especially labor, are configured (trained) for a given technology but the economy demands goods and services using another technology. Employers seek workers who have one type of skill and workers seeking employment have a different type of skill. This mismatch in skills, largely the result of technological progress, creates unemployment of the structural variety. Structural unemployment is one of four unemployment sources. The other three are cyclical unemployment, seasonal unemployment, and frictional unemployment. Frictional and structural unemployment are the two components of natural unemployment. Structural unemployment is an inherent part of any healthy, prosperous, growing economy. As an economy expands through technological progress, new (and usually more satisfying) products require different skills for production. For example, farming skills were important in the 1800s, manufacturing skills were needed for much of the 1900s, and now information processing skills have moved to the top of the economy's list. Structural unemployment then rears its head when a worker is trained for a job that is eliminated by this progress. The only way to completely eliminate structural unemployment is to prevent technological progress and all of the benefits that this brings.
To see how structural unemployment is likely to emerge, consider the employment of Alton Abernathy. For the better part of his adult life, Alton attached "needle arms" to record players at the HyFy Electronics factory in Shady Valley. Alton was the best needle-arm attacher who had ever worked at the HyFy Electronics factory. For over thirty years Alton attached needle arms to record players.
Over the course of Alton's career, technological progress occasionally threatened to replace phonograph records with newer sound recording systems that might have eliminated Alton's job of attaching needle arms. First, came 8-track tapes; fortunately a false alarm and a passing fad. Record players, and Alton's employment lived on. Next, came cassette tapes; a bigger threat, but not big enough to change the public's fancy for record players. Alton's needle-arm attaching employment lived on.
Then came CDs. A dark day for Alton. Digital compact disc technology rapidly replaced phonograph record technology as the primary means of distributing recorded music. The HyFy Electronics factory ceased the production of record players, closed its doors, and in so doing eliminated Alton's needle-arm attaching employment. In its place, a new factory manufacturing compact disc players, OmniDisc Unlimited, began operation. Much of this factory was automated. The skills needed to manufacture compact disc players involved computer programming and high-tech equipment operation. Needle-arm attaching was no longer a useful skill.
At the age of 58, Alton had become structurally unemployed. Many jobs were available at the new OmniDisc factory, but Alton had neither the skill, training, nor education needed. Technological progress had claimed another victim.
The BadLike most sources of unemployment, structural unemployment means personal hardships and lost production.
The bads of structural unemployment are generally worse than those of cyclical or frictional unemployment. Structural unemployment tends to last significantly longer than other types of unemployment, not just a few weeks or months, but often years.
- Personal Hardships: The primary problem with structural unemployment is the personal hardships inflicted on the unemployed workers. Even if structurally unemployed workers obtain income from unemployment compensation, welfare, and other transfer payments, they cannot purchase as many goods and services and thus experience a drop in living standards.
There are also the psychological hardships experienced by structurally unemployed workers. In many cases, workers like Alton are unemployed after decades at a particular job. People generally derive a sense of "self worth" from their jobs, that someone values their work and likes them enough to give them a paycheck. While all unemployed workers lose this self-esteem reinforcement, for structurally unemployed workers the loss can be particularly devastating.
The reason is that society overall, not just a given firm, has decided that the structurally unemployed worker is "not valuable." After a lifetime of being "valuable," the workers is now "not valuable." To make matters worse, the technological progress creating the structural unemployment means that there is little hope that a structurally unemployed worker will ever become "valuable" again (short of retraining).
- Lost Production: Of course, when Alton becomes unemployed, the economy loses out on his productive activity. While society might no longer demand record players, Alton could be engage in the production of another good. This lost production might be a small blip in a multi-billion-dollar annual gross domestic product, but it is a blip nonetheless. And considering that a few million workers are structurally unemployed at any given time, these seemingly insignificant blips add up to significantly lost production for the economy.
The GoodLost production and personal hardships are certainly undesirable, but they must be weighed against the benefits associated with structural unemployment. Structural unemployment is an inherent part of any growing, expanding, prospering economy driven by technological advances. Such technological progress improves living standards for most members of society.
While Alton most definitely suffers with the advent of CD recording technology, millions of other folks benefit from this technological advance. People ARE better off with the new technology than the were with the old. Of course, one might question whether an improvement in something as "inconsequential" as better music entertainment is worth Alton's livelihood.
Eliminating structural unemployment can be accomplished by preventing any and all technological progress. No worker would ever become unemployed because existing skills do not match required production. Of course, this strategy also prevents the improvement in living standards.
And The PoliciesWhile totally eliminating structural unemployment is probably unwise, if not impossible, it can be reduced through education and training programs. Alton can acquire the new skills needed by the OmniDisc compact disc player factory. Or perhaps Alton can seek formal education by attending college.
Education and training are THE solution to structural unemployment, but there is a catch. The benefits accrued from education depend directly on the number of productive years a worker has remaining before retirement. The young incur the investment expense of a formal education (college) because they have forty-plus years to recoup this cost. A 58-year old structurally unemployed worker like Alton, does not have as much productive time remaining. Assuming an age of 65 years for retirement, should Alton spend 4 years in college, then he has only 3 years of productive work to recoup this expense. If Alton should decide to extend his formal education, perhaps another 4 or 5 years of graduate, medical, or law school, then Alton should complete his re-education just in time to retire. While this might be good for Alton's self esteem, it provides little help to the economy.
Of some importance, expansionary fiscal and monetary policies have little if any long term affect on structural unemployment. While stimulating the economy can reduce structural unemployment temporarily, so long as technological progress continues, structural unemployment eventually returns to its "natural" level.
STRUCTURAL UNEMPLOYMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 24, 2024].
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