Cyclical Unemployment

What Is Cyclical Unemployment?

Cyclical unemployment is a type of unemployment that occurs when the economy is in a recession. Cyclical unemployment can also be caused by structural problems in the labor market, such as a shortage of jobs in certain sectors.

Cyclical unemployment is often measured using the unemployment rate, which is the percentage of the labor force that is unemployed. The unemployment rate tends to rise during economic recessions and fall during periods of economic expansion.

 

Cyclical Unemployment

(Source: US Bureau of Labor Statistics)

 

What Causes Cyclical Unemployment?

There main cause of cyclical unemployment is recessions.

Recessions

Recessions are periods of economic contraction. They are typically caused by a sharp decrease in aggregate demand, typically brought about by the tightening of monetary policy, which can lead to a decrease in production and a rise in unemployment.

When central banks are faced with an issue of too-high inflation, they get inflation down by lowering total spending (which is the cause of the inflation).

You do this by taking away money and credit.

How do you take away money and credit?

You reduce the value of financial assets, tighten credit, and reduce incomes via increased unemployment.

Cyclical Unemployment vs. Structural Unemployment

Structural problems in the labor market can also lead to higher unemployment.

For example, if there is a shortage of jobs in certain sectors, this can lead to an increase in unemployment even when the overall economy is doing well.

This can happen when an economy is changing and its labor force is not well-equipped to handle it.

For instance, if an economy is changing from manufacturing to services, this can mean many trained to work in manufacturing are not well-prepared for this transition.

This could also apply to a shift in services to digital technologies. If an economy has too many lawyers and not enough software engineers, this could lead to a respective surplus and deficit in these job markets until the imbalance is rectified through job retraining, new workers, immigration, and so on.

 

How Can Cyclical Unemployment Be Reduced?

There are two main ways to reduce cyclical unemployment: through fiscal policy and through monetary policy.

Fiscal policy

Fiscal policy refers to government spending and taxation.

Supply-side

During periods of economic recession, the government can take supply-side measures, such as increase spending on things like infrastructure and education, which can create jobs and help boost economic growth.

Demand-side

The government can also take demand-side measures, such as reducing taxes to help businesses and consumers have more money to spend.

Monetary policy

Monetary policy refers to the actions of the central bank. During periods of economic recession, the central bank can lower interest rates to encourage borrowing and spending. The central bank can also print money via quantitative easing programs, if necessary, which can help increase the money supply and boost economic growth.

 

What Are the Effects of Cyclical Unemployment?

Cyclical unemployment can have a number of negative effects on the economy.

Decrease in production and output

First, it can lead to a decrease in production and economic growth.

This can cause a decline in living standards as people have less money to spend on things like food, clothing, and shelter.

Increased poverty, inequality

Cyclical unemployment can lead to an increase in poverty and inequality.

This is because people who lose their jobs are more likely to become poor, and the gap between the rich and the poor tends to widen during periods of economic recession.

The inequality aspect is often the reason why the Great Depression is perceived to have lasted until World War II.

The actual “depression” element in the US was rectified by 1933 through the printing of money to get around the constraint of zero/near-zero short-term interest rates and by breaking the dollar’s link with gold.

But the conditions for the poorest members of society lasted longer.

Decreased consumer confidence

Cyclical unemployment can also lead to a decrease in consumer confidence.

This can further exacerbate economic recessions as people become less likely to spend money, which can lead to even more job losses.

 

What Are Some Examples of Cyclical Unemployment?

There have been a number of historical examples of cyclical unemployment.

The Great Depression was a period of severe economic contraction that began in 1929. During this time, the unemployment rate rose to unprecedented levels, reaching as high as 25 percent in 1933.

The recession of 2001 was a period of economic downturn that began in the United States and spread to other parts of the world. The unemployment rate rose to 5.8 percent in 2003, which was the highest level since 1993. The recession was caused by a number of factors, including the bursting of the dot-com bubble and the 9/11 attacks.

The Great Recession was a period of economic downturn that began in 2007-08 in most parts of the world and lasted for several years. During this time, the unemployment rate rose to 10 percent in 2009, which was the highest level since 1983.

 

What Is the Difference Between Cyclical and Frictional Unemployment?

Cyclical unemployment is unemployment that occurs during periods of economic recession. Frictional unemployment is unemployment that occurs even when the economy is doing well.

Frictional unemployment is often caused by things like job search costs and mismatches between workers and jobs, such as underemployment. It can also be caused by structural problems in the labor market, such as a shortage of jobs in certain sectors.

Cyclical unemployment, on the other hand, is always caused by economic recessions. It can also be made worse to some degree by structural problems in the labor market.

 

What Is the Difference Between Cyclical and Structural Unemployment?

Cyclical unemployment occurs during economic recession. Structural unemployment is unemployment that will also occur even when the economy is doing well.

Structural unemployment is caused by supply and demand issues in certain sectors (such as too many unskilled laborers and not enough “new economy” workers). It can also be caused by a lack of training for workers in certain industries.

 

What Is the Difference Between Cyclical and Seasonal Unemployment?

Cyclical unemployment is when there is a general downturn in the economy and jobs are lost across a number of sectors. Seasonal unemployment is when jobs are lost in specific industries due to changes in demand (such as retail jobs being lost after Christmas).

The main difference between the two types of unemployment is that cyclical unemployment is caused by economic factors beyond the control of individual businesses, while seasonal unemployment is caused by predictable changes in demand.

Cyclical unemployment is often more difficult to address, as it requires macroeconomic solutions such as fiscal stimulus.

Seasonal unemployment can be addressed more easily, through measures such as labor market flexibility or targeted training programs.

For example, in a cold climate, a construction worker might have a lot of work during the summer months and little during the other months of the year.

In that case, he or she could structure their employment to take advantage of the busy summer months paired with a steady job during the less active months.

Working in education would be one example, as teachers in many parts of the world work a school year that starts in August or September and ends in May or June, allowing 2-3 months off during the summer.

Types of Unemployment: Frictional, Structural, Cyclical, and Seasonal

 

FAQs – Cyclical Unemployment

Is Cyclical Unemployment Long-Term?

No, cyclical unemployment is not long-term. Cyclical unemployment happens during periods of economic recession, which are typically short-term.

However, the effects of cyclical unemployment can last long after the recession has ended, as it can take a long time for people to find new jobs and for businesses to recover from lost revenue.

What Causes Cyclical Unemployment?

Cyclical unemployment is caused by economic recessions.

It can also be caused to some degree by structural problems in the labor market, but these problems are typically made worse by economic downturns.

Is There A Way to Avoid Cyclical Unemployment?

There is no sure way to avoid cyclical unemployment, as it is caused by economic recessions.

However, there are things that can be done to mitigate the effects of cyclical unemployment, such as providing targeted training programs for workers who have lost their jobs.

 

Summary – Cyclical Unemployment

Cyclical unemployment is unemployment that occurs during economic recession.

Cyclical unemployment is often more difficult to address than other types of unemployment, as it requires macroeconomic solutions such as fiscal stimulus and monetary expansion from central banks.

However, there are things that can be done to mitigate the effects of cyclical unemployment, such as job retraining to help workers adapt to new lines of work or a changing economy.

 

 

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