Cyclical Unemployment: Definition, Causes and How it Compares

Cyclical Unemployment

What causes cyclical unemployment?

Businesses become less productive as trends in overall economic growth rise and fall in cycles, and economic contraction begins. This is frequently brought on by a stock market crash, when people lose faith in the economy and put off buying things.

Reduced demand for goods and services during an economic downturn, also known as a recession, prevents the economy from supporting full employment, and employers fire workers as a result. It can be challenging for those who have lost their jobs to find new employment during a recession because most companies tend to follow the same pattern. In times of cyclical unemployment, there are more qualified workers looking for work than there are open positions, which also feeds the cycle of unemployment.

What is cyclical unemployment?

The idea of cyclical unemployment describes the loss of jobs brought on by an economic downturn or sluggish expansion of the economy. This phrase is used by economists to denote the fact that business productivity rises and falls in cycles rather than in a straight line.

Unemployment typically rises during recessions and declines during economic expansions. Because there is less demand for goods during a recession, there is less need for workers. When more people lose their jobs than usual, they also spend less money on goods, which hinders economic growth by reducing financial investments and production levels. Governments may use a range of policy instruments, such as stimulus packages, to promote economic growth during a recession in order to lessen the negative economic effects of cyclical unemployment.

Examples of cyclical unemployment

Examples of cyclical unemployment brought on by severe downturns in economic growth include the following:

Stock market crash of 1929

Following a significant economic upturn throughout the 1920s, unsteady financial trends, primarily caused by excessive stock buying, resulted in a sharp decline in stock prices as investors rushed to sell and recoup their losses. Businesses with profitable public stocks suddenly lost nearly half of their previous wealth, and in October 1929, the financial foundation of the US stock market collapsed.

Even though the market gradually started to grow again over the following ten years, the nation’s workforce was crippled by unprecedented unemployment for almost as long. Businesses cut their labor forces and millions went without jobs. The Great Depression is another name for this instance of a particularly high cyclical unemployment rate.

Recession of 2008

Cycle-related unemployment increased again in 2008, largely due to the housing market. Several people defaulted on their debts after housing prices rose and loans were simple to obtain, which caused another financial crisis. Previously available loans became more and more difficult to obtain. Construction jobs for millions of people were lost as new home construction and remodeling almost completely ceased.

This crisis, also known as The Great Recession, was exacerbated by structural unemployment as factories switched to computerized production methods, which resulted in the layoff of more skilled workers.

COVID-19 pandemic

The COVID-19 pandemic caused the global economy to collapse in the first quarter of 2020. Record unemployment was caused by forced business closures to stop the coronavirus, decreased revenue, and decreased consumer demand. All workers were affected by the pandemic, but women, people of color, those making less money, and those with less education were particularly affected. However, as companies like restaurants and shops have been permitted to reopen, they have hired new staff to handle the increased demand. Governments all over the world have also made an effort to boost the economy in a variety of ways, such as by giving stimulus checks to people who make less money and providing tax breaks to people who own small businesses and have young children.

What are the effects of cyclical unemployment?

Cyclical unemployment at its peak can lead to the following:

How does cyclical unemployment end?

Here are some methods for ending cyclical unemployment, which may last only a few months or for many years:

Other types of unemployment

Aside from cyclical, economists recognize other forms of unemployment. Here are the other types of unemployment:

Structural unemployment

Structural unemployment is caused by fundamental changes in economic production. People in this type of unemployment don’t have the skills employers want in order to hire them for a new position. For instance, the transition to computerized goods caused growth in one sector to shift to others as digital tools became the norm for both personal and professional use.

Institutional unemployment

When an institution, such as the government or a union, has an impact on the labor force through labor laws and practices, this is known as institutional unemployment. It happens when long-term incentives or initiatives impact the economy. For instance, when states enact high minimum wage laws, unemployment may occur as a result of businesses cutting back on staff due to rising costs.

Seasonal unemployment

Seasonal demand spikes in some industries cause seasonal unemployment. For instance, to meet demand during the holiday season, retail stores and delivery services frequently hire more staff. Many jobs are eliminated until the following season as there is no longer a need for additional workers after the holidays. Statistics account for this type of unemployment because it is foreseeable and there will be more openings during the upcoming season.

Frictional unemployment

The period of time that passes between changing jobs is referred to as frictional unemployment. Many economists believe that this cycle of unemployment is advantageous because it shows that people are moving up and generally occupying higher positions, which suggests that there are more jobs available.


What is cyclical of unemployment?

With changes in economic activity over the business cycle, cyclical unemployment occurs. A lack of demand for goods and services during a downturn in the economy leaves fewer jobs open for those who want to work.

What is cyclical unemployment give an example?

When construction workers were laid off during the Great Recession following the financial crisis of 2008, this was an example of cyclical unemployment. Construction of new homes fell sharply as a result of the struggling housing market, which increased the cyclical unemployment rate for construction workers.

What is the difference between seasonal and cyclical unemployment?

Causes of Cyclical Unemployment
  • Decline in Demand. When demand declines across the board in the economy, that is when cyclical unemployment is most prevalent.
  • Negative multiplier effects. …
  • Market Crash. …
  • Falling Demand. …
  • Deflation. …
  • Declining Profits. …
  • Decreasing Productivity. …
  • Falling House Prices.

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