What is Cyclical Unemployment? Definition
Cyclical unemployment is unemployment that results when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction. Let’s explore this type of unemployment in a little more detail.
Cyclical unemployment is directly related to the level of macroeconomic activity, which is the aggregate, or combined, the activity of all persons and entities involved in an economy. This aggregate activity is cyclical instead of linear – economic activity tends to rise and fall, instead of always rising or always falling.
Let’s look at increases in the business cycle first, and their effect on unemployment. When economic activity increases, we call this an expansionary phase of the business cycle because it represents economic growth. Unemployment tends to drop during periods of growth because consumers are buying more and businesses are producing and selling more. These increases in production and sales usually require more people, resulting in increased hiring and an overall reduction in the rate of unemployment.
Now let’s turn to the bad news. When economic activity slows, or contracts, unemployment will increase. During times of slow growth, no growth or a period of economic contraction, a recession, demand for products and services declines. Employers make less, sell less and don’t need as many employees. Employers will lay off those employees who are not needed, which raises the unemployment rate. This increase in unemployment can lead to a problematic feedback loop where unemployed people can no longer afford to buy stuff, which means that demand decreases even further and more people are laid off, leading to even less demand and so on.
Cyclical Unemployment Definition
Cyclical unemployment is the component of overall unemployment that results from economic upturns and downturns. Unemployment rises during recessions and declines during economic expansions. Moderating cyclical unemployment during recessions is a major motivation behind the study of economics and the goal of the various policy tools that governments employ to stimulate the economy.
- Cyclical unemployment is the contribution of economic recessionary or expansionary conditions to the total unemployment rate.
- Cyclical unemployment rises during recessions and falls during economic expansions and is a major focus of economic policy.
- Cyclical unemployment is one factor among many that contribute to total unemployment, including seasonal, structural, frictional, and institutional factors.
What Is Cyclical Unemployment
Cyclical unemployment relates to the irregular ups and downs, or cyclical trends in growth and production, as measured by the gross domestic product (GDP), that occur within the business cycle. Most business cycles eventually reverse, with the downturn eventually shifting to an upturn again, followed by another downturn.
Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work at that point within the business cycle. When demand for a product and service declines, there can be a corresponding reduction in supply production to compensate. As the supply levels are reduced, fewer employees are required to meet the lower standard of production volume. Those workers who are no longer needed will be released by the company, resulting in their unemployment
When economic output falls, the business cycle is low and cyclical unemployment will rise. Conversely, when business cycles are at their peak, cyclical unemployment will tend to be low because there is a high demand for labor.
Cyclical Unemployment Example
Over time, the economy experiences many ups and downs. That’s what we call cyclical unemployment because it goes in cycles. Cyclical unemployment occurs because of these cycles. When the economy enters a recession, many of the jobs lost are considered cyclical unemployment.
For example, during the Great Depression, the unemployment rate surged as high as 25%. That means one out of four people were willing and able to work, but could not find work! Most of this unemployment was considered cyclical unemployment. Eventually, unemployment came down again. As you can see, at least part of unemployment can be explained by looking at the cycles, or the ups and downs of the economy.
Frictional unemployment occurs because of the normal turnover in the labor market and the time it takes for workers to find new jobs. Throughout the course of the year in the labor market, some workers change jobs. When they do, it takes time to match up potential employees with new employers. Even if there are enough workers to satisfy every job opening, it takes time for workers to learn about these new job opportunities, and for them to be considered, interviewed and hired.
When Cindy graduated from college, she begins looking for work. Let’s say it takes her four months to land a new job. During this time, she is frictionally unemployed.
Let’s talk about structural unemployment, which occurs because of an absence of demand for a certain type of worker. This typically happens when there are mismatches between the skills employers want and the skills workers have. Major advances in technology, as well as finding lower costs of labor overseas, lead to this type of unemployment.
When workers lose jobs because their skills are obsolete or because their jobs are transferred to other countries, they are structurally unemployed. It’s structural unemployment because the structure of the economy has changed, not because of the regular ups and downs of it.