Cyclical unemployment: Definition, Causes, Solutions

The percentage of total unemployment that is specifically caused by cycles of economic expansion and contraction is known as cyclical unemployment. Typically, unemployment increases during economic downturns and decreases during boom times.

Cyclical unemployment explained

Cyclical trends in production and growth as indicated by the GDP, that take place throughout the business cycle are what are meant by cyclical unemployment. 

The economic cycle is weak when economic output declines, and cyclical unemployment will increase. On the other hand, due to a high demand for labor while economic cycles are at their apex, cyclical unemployment will typically be low. When there is insufficient demand, the company reduces production and, in the process, needs to let go of many workers, which causes cyclical unemployment. Any industry could be affected by it.

There may be a commensurate decrease in supply output to make up for a loss in demand for a good or service. To fulfill the lower norm of production volume, fewer workers are needed when supply levels are cut. A company may relieve any employees whose positions are less necessary, leading to sudden unemployment.

Cyclical unemployment may occur in scenarios where unemployment is cyclically influenced by economic cycles or industry trends.

Cyclical unemployment is connected to an industry's business cycle. It is a direct effect of a decline in consumer demand that caused a drop in the demand for labor.

The macroeconomic state of the economy is tied directly to cyclical unemployment. When the economy is in a slump, it would increase, and when it starts to recover, it would decline. Economic activity is not linear because it frequently fluctuates up and down.

When the economy contracts, there will be less overall demand and less consumption, which will cause production cuts across a range of businesses. A typical example can be seen in the auto industry's decreased output when demand for cars was waning as a result of rising gas prices and the global economic downturn.

Another example was the 2008 housing bubble burst which ushered in the Great Recession. The market for new housing decreased as an increasing number of borrowers failed to make their mortgage payments and as requirements for new loans intensified.

With the national unemployment rate rising and more borrowers struggling to make their mortgage payments, more properties were at risk of foreclosure, further decreasing demand for new buildings. This also led to the layoff of hundreds of thousands of workers in the construction industry.

Over the ensuing years, as the economy recovered, the financial sector experienced a return to profitability and increased loan production. Prices rose as a result of people renovating or repurchasing properties.

Cyclical Unemployment Solutions

Rising cyclical unemployment is a bad indicator since it indicates that the economy is slowing down.  In order to support the economy, the government would therefore need to address the problem through alternative fiscal and monetary policies.

Two types of expansionary fiscal policy exist. A decrease in taxes or an increase in government spending. In order to increase taxes in the long-run, the government is borrowing money from the future to use in the moment through increased government spending.

John Maynard Keynes, an economist, strongly praised its efficacy. He said that in order to stop cyclical unemployment and diminishing aggregate demand, the government should intervene.

Such reasoning assumes that government spending would occur. Whether it be construction initiatives, government-run employment initiatives, or rising welfare benefits. It is expected that the money would then spread across the economy as a whole, preventing such a sharp decrease in demand.

Governments lower taxes with the intention of putting more money in people's pockets. According to the concept, consumers should have more disposable money as taxes are reduced.

Other types of unemployment

One of the five types of unemployment that economists acknowledge is cyclical unemployment. There are other types of unemployment than cyclical unemployment, such as structural and frictional unemployment.

·        Structural unemployment: The disparity between the competencies of the unemployed and the jobs that are available is referred to as structural unemployment. It differs from cyclical unemployment in that it results from factors beyond the business cycle.  It happens when an underlying economic shift makes it challenging for some individuals to find work. It is more difficult to reverse than other forms of unemployment. Long after a recession has ended, structural unemployment may keep the unemployment rate high. If governments ignore it, the rate of natural unemployment rises.

·        Frictional unemployment: Transitions in employment that are voluntary within an economy lead to frictional unemployment. Even in an expanding, stable economy, frictional unemployment is an inevitability. Frictional unemployment relates to individuals who choose to quit their current employment in pursuit of new ones and people who are just starting out in the workforce. It excludes employees who hold onto their existing position until they find a new one. It is a component of natural unemployment, which is the lowest unemployment rate in an economy as a result of macroeconomic variables and labor movement, and it affects the overall employment landscape.

·        Institutional unemployment: Long-term or permanent institutional elements and economic incentives lead to institutional unemployment. Institutional benefits and incentives, such as high minimum wages, social assistance programs, stringent licensing rules, discriminatory hiring practices, or high unionization rates, can result in institutional unemployment.

·        Seasonal unemployment: People who are unemployed at specific seasons of the year when there is a lower-than-normal demand for labor are said to be experiencing seasonal unemployment. Seasonal unemployment is the term used to describe a brief period of time when there are fewer job openings.

·        In areas with high tourist traffic, seasonal unemployment is common since various tourist attractions may cease or scale back activities according to the season and time of year. This is particularly true for outdoor tourist sites that may only be open under specific weather conditions.