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Cyclical Unemployment: Definition, Cause, Types, Effects & More
One of the major reasons for unemployment in current times is cyclical unemployment. This type of unemployment depends on the strength of the economy and rises and falls with it. Cyclical unemployment is the highest during times of recession in the economy. However, this situation does not stay for a prolonged time, as employees start to find jobs with the strengthening of the economy.
In this article, you will get some general details about cyclical unemployment. First, you will learn the cyclical unemployment definition, followed by the causes of such unemployment. Then we will learn about this situation in the economy with the help of an example. Hence, to learn more about this type of unemployment, read on through to the end of the article.
What Is Cyclical Unemployment?
The term cyclical unemployment comes along with the word ?recession.? In simple words, cyclical unemployment refers to the percentage of people that are without work during an economic cycle. However, this type of unemployment is not long terms and recovers along with the strengthening of the economy.
According to Investopedia,
?Unemployment typically 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.?
As the GDP of the country fluctuates, it affects the economic activities of the country accordingly. A significant fall in the GDP, or the growth rate of GDP, might lead to layoffs, which leads to economic recession in the country.
Here, the job of economists is to study and predict the trends in economic growth and cyclical unemployment. Hence, the government starts employing policymakers to bring the economy to a better place. This helps in creating better fiscal and monetary policies, which further helps the economy to promote a robust labor force. All these factors help in creating an economic upswing.
However, one thing you must note here is that economic recessions typically last for six months to one year. Hence, how much you remain unemployed depends a lot on the length of the economic recession.
What Are The Major Stages Of Cyclical Unemployment?
As cyclical unemployment occurs during an economic recession and stays for a limited period of time (six months to one year), it fluctuates and follows a certain pattern. Here are the stages cyclical unemployment goes through during a recession:
1. There is a recession in the overall economy due to a variety of reasons. Hence, there is a lesser demand for products and services among consumers.
2. Due to lesser demand in the market, the production of companies gets hit. As a result, there is lesser demand for workers. The amount of people in the workforce is higher as compared to the demand of the market.
3. Companies start laying off their employees. Hence, people collect more unemployment benefits, which, in turn, strains the economy further as the recession increases.
4. As a result, there is a rise in cyclical unemployment in the economy.
5. As the economy gets an upturn with increased demand, there is a higher need for workers. Hence, cyclical unemployment declines.
What Are The Major Causes Of Cyclical Unemployment?
According to economists, cyclical unemployment is the result of businesses not having enough demand for labor. Hence, all those people that are looking for work at the time in the business cycle are not employed as a result.
Furthermore, an article on Investopedia adds,
?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.?
The following are some of the major causes of cyclical unemployment:
- People start spending less money when the rate of economic growth declines or when the growth is negative.
- Reduced demand in the economy reduces the rate of production, which lead to companies earning less revenue.
- As companies earn less revenue and a declined demand for products and services, the need for workers decreases.
- In such times, companies start laying off employees that they do not need anymore. Most of them are part-time, seasonal, or entry-level workers.
- As a result, the number of unemployed people surpasses the number of available jobs in the market.
When the economy gets stronger, the demand in the market increases. Hence, the production and profits of the company also increase. Therefore, with a rise in production demand and revenues, companies start hiring more workers. As a result, cyclical unemployment starts to decrease in the economy.
Cyclical Unemployment Example
The most common example of cyclical unemployment is the one that happened during the Great Recession of 2008. During the 2008 financial crisis in the USA, the real estate and housing industry got a big blow, as borrowers were unable to pay their home debts. Furthermore, many people could not get loans to buy new homes, and the demand for new houses also lessened. Thereby, construction companies and builders stopped building new homes.
Here is what the US Federal Reserve History says –
?Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 to its trough in 2009Q2, the largest decline in the postwar era (based on data as of October 2013). The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009 and peaked at 10 percent in October 2009.?
Hence, the rate of unemployment continued to increase with time, as there were only fewer people that could afford mortgage payments, and more homes received foreclosure. As a result, the demand for construction declined accordingly.
Bottom Line
You can see from the article that cyclical unemployment happens due to economic recession and the weakening of the economy. Here, employees lose their jobs due to unloading by various organizations. Such type of unemployment rises during economic recessions and falls during economic expansions.
Hence, to control cyclical unemployment, governments need to focus on creating stable economic policies so as to ensure that the economic situation of the country is strong. How do you think cyclical unemployment affects society and the economy as a whole? Share your thoughts with us in the comments section below.
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