Practice Firms: Structural Unemployment

Sep 10, 2015

Recently the New York Times published an article profiling a unique type of business growing in popularity around the world called practice firms. These types of companies preform all of the functions of a real business except for the production of actual goods or services. They work as a ‘learn-by-doing’ training network for those without jobs, thereby redefining what it means to be unemployed. Participants hope that these firms, which pay with experience rather than money, will result in eventual gainful employment, prevent large resume gaps, and decrease the national rate of structural unemployment.

Unemployment is a measure of the number of citizens in the labor force – people of working age and actively seeking employment – who do not have a job. Though often summarized in one number, it encapsulates three types of unemployment: frictional, cyclical, and structural. Frictional unemployment refers to short periods of unemployment between jobs. Cyclical unemployment can be explained by poor economic conditions. Structural unemployment arises out of a disparity between employers’ needs and workers’ abilities. In other words, there could be high unemployment in conjunction with available positions, but if the skill set of the job-seekers is wrong for the position, then the situation remains. To many economists, structural unemployment is the most concerning of the three because it is long term.

Enter the practice firm.

Originating in post WWII Germany, the practice firm has since expanded, providing training for students and recent graduates in countries across Europe, Asia, and even here in America. Recently in Europe, older citizens affected by the recession have been increasingly utilizing practice firms to learn new skills in the hopes of becoming more marketable to employers. While there is no immediate financial incentive to work at a practice firm, employees often report a boost in self-confidence related to their improved professional abilities. And, working at a practice firm can help individuals avoid the transition from unemployed to discouraged worker—someone who has been unsuccessfully searching for a job for so long they give up looking.

Practice firms hope to directly address a market inefficiency by teaching the skills that companies demand, thereby helping to decrease structural unemployment and proving to be an innovative solution to a prevailing problem. 

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