Cyclical unemployment is directly related to macro-economic factors in an economy as the unemployment rate moves along with the business cycle phases. Usually, the business cycle has four phases, i.e., trough, expansion, peak, and contraction, which define the fluctuation in demand or production activity in an economy measured by a growth rate of real gross domestic product (GDP).
In this business cycle phase, overall economic activity increases, representing the spike in the overall demand, and the consumer starts buying more items. To meet this increase in demand, businesses react by increasing their production capacity by investing in equipment. In addition, businesses require more people, which forces them to hire more employees to fulfill the economy’s ongoing demand. Hence, this results in an overall drop in the unemployment rate in an economy, and the overall GDP growth rate increases.
As the name suggests, the business cycle reaches its peak and the maximum level of economic output. Both consumer spending and business investments increase but at slower rates. The product price increases due to an increase in the inflation rate. At this point, the economy is at its full potential employment, which means the unemployment rate is nearly zero. The economic growth stabilizes for some time but soon starts to decline. The unemployment rate decreases, but new recruitments slow down.
The trough is a phase in the business cycle where the contraction period ends & the GDP growth rate changes from negative to positive. Once again, overall consumer demand starts increasing in an economy, leading to the expansion period in an economy. The unemployment rate stops increasing & begins to fall as economic demands pick up.
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Types of unemployment
Economists recognize five types of unemployment, including cyclical, that affect a populations overall unemployment rate:
Cyclical unemployment fluctuates naturally with the economy. High cyclical unemployment only occurs during periods of recession, when consumer demand for products and services is low and businesses cant afford to employ all of their workers. Governments often create policies during economic downturns to encourage growth, prevent recessions and lower cyclical unemployment rates.
Frictional unemployment is a temporary and voluntary type of unemployment caused by people looking for new jobs. It is the most common type of unemployment. Workers who are frictionally unemployed include:
Frictional unemployment indicates a transition in someones life. It is typically short term because that individual only remains unemployed until they find a new job. This type of unemployment can be positive if it means the economy is stable or growing and people are looking for better jobs.
Institutional unemployment occurs when people are unemployed because of government and societal factors and incentives. Things that can contribute to institutional unemployment include:
The sources of institutional unemployment are usually permanent or long term.
Seasonal unemployment occurs when demand for certain jobs and skills changes from one season to the next. Some industries, such as the ski industry, only operate during part of the year. This type of unemployment only affects workers whose jobs depend on the season. Examples include:
The length and time of year of seasonal unemployment vary by industry.
Structural unemployment results from a change in the economys structure. It occurs when the supply and demand for available jobs and certain skills in the market do not match. Jobs are available, but the population of people looking for employment doesnt have the necessary skills to fill them.
Structural employment typically happens when major technological changes affect an entire society and economy. Consider cars replacing horse-drawn transportation or automation replacing human manufacturing, for example. When changes like these occur, certain jobs become obsolete, and the people working them become unemployed. They usually have to learn new skills to find employment.
Many or all of these types of unemployment can occur at the same time. All but cyclical unemployment can occur in a stable or growing economy.
What does it mean to be cyclically unemployed?
If you are cyclically unemployed, it means that your employer has laid you off because your company is trying to save money during a period of slow business. Cyclical unemployment levels rise and fall with the markets, meaning they are high during recessions and low during expansions. Therefore, they are typically short term. How long you remain cyclically unemployed depends on the length of the recession, which can last at least six months to a year.
Cyclical unemployment occurs because people spend less money during economic declines. The reduced demand for products and services causes a decrease in production. Companies not only earn less revenue but also need fewer workers to meet demand, resulting in layoffs. The first employees to get laid off are those the company needs least, such as part-time, seasonal or entry-level workers.
During periods of high cyclical unemployment, the number of unemployed people in the market surpasses the number of available jobs. The economy eventually rebounds, however, and sales, production and profits increase. Companies then need to hire more employees to meet that demand.
Cyclically unemployed examples
Cyclical unemployment has occurred repeatedly throughout history as markets rise and fall. Here are four examples of cyclical unemployment:
Example 1: The Great Recession
During the 2008 financial crisis, the housing industry collapsed. Borrowers could not pay the debts on their homes, many people could not get loans for new homes and demands for new housing declined. As a result, builders stopped producing new homes. Unemployment rates continued to increase, fewer people could afford their mortgage payments, more homes underwent foreclosure and demand for construction fell further.
Throughout the Great Recession, real estate agents, architects, appraisers, loan agents and about two million construction workers lost their jobs because of cyclical unemployment. As the economy recovered and home buyers were able to get loans more easily, however, real estate prices increased. The returned demand for home remodels and new housing created jobs for construction workers and other professionals in the industry.
Example 2: The automotive industry
The car industry tends to suffer during recessions, including the 2008 financial crisis. Vehicles are big purchases for most individuals, so people buy fewer cars when the economy is struggling. As consumer demand decreases, car dealerships and manufacturers lay workers off because they dont need as many employees. However, when the economy rebounds, demand increases and people start buying cars again, which helps auto workers get their jobs back.
Example 3: World War II
World War II created great demand for mining and manufacturing jobs, and employment rates in these industries were high. After the war, however, production slowed due to reduced demand for wartime machinery and products. Additionally, an influx of people returned from military service needing jobs. These factors resulted in a short recession and high unemployment rates that rebounded a few years later into a period of significant economic growth.
Example 4: COVID-19
The economy has recently slowed because of the COVID-19 pandemic. Many businesses were forced to close temporarily, and consumers self-quarantining or following stay-at-home orders were buying fewer products. The business closures, reduced revenue and decreased buyer demand resulted in many companies laying off their employees. Tens of millions of people applied for unemployment in the United States in the spring of 2020. However, as businesses like retailers and restaurants have been allowed to reopen, they have rehired employees to meet renewed demand.
What are the 4 types of unemployed?
- Frictional unemployment. …
- Structural unemployment. …
- Cyclical unemployment. …
- Seasonal unemployment.
Are cyclically unemployed people unemployed?
How do you find cyclically unemployed?
What is cyclical unemployment rate?