After reading about frictional unemployment from our last discussion, you now have a good look at unemployment itself. However, there is more to discuss; that is, cyclical unemployment and its significance. Let's break it down.
Cyclical Unemployment refers to the type of unemployment that is directly related to the fluctuations in the economy. It occurs when there is a downturn or recession, leading to a reduction in demand for goods and services, and thus, fewer jobs are available.
Essentially, cyclical unemployment is most related to the business cycle. Recall the four main stages of the business cycle:
The business cycle consists of four stages: expansion, where the economy grows and employment rises; peak, when the economy reaches its highest point of growth; contraction, where economic activity slows, leading to layoffs and higher unemployment; and trough, the lowest point before the economy begins to recover and enter a new expansion phase.
But what exactly causes cyclical unemployment to occur?
Economic downturns can cause cyclical unemployment to spike. During recessions, economic activity slows down, reducing demand for labor. Companies may lay off workers or freeze hiring until the economy recovers.
The business cycle is a huge factor here, too. The economy typically moves in cycles of expansion and contraction. During expansion, employment rises, while during contraction or recession, cyclical unemployment increases.
Reduced consumer spending also affects cyclical unemployment. When people have less disposable income due to an economic downturn, they spend less, leading to lower demand for goods and services. This results in businesses needing fewer workers.
Cyclical unemployment is not a choice. People lose jobs due to external economic factors beyond their control, such as recessions or financial crises. Cyclical unemployment also directly correlates with the ups and downs of the economy. As the economy improves, cyclical unemployment tends to decrease, and as the economy worsens, it increases. Although significant, cyclical unemployment is generally temporary, lasting as long as the economy remains in a downturn.
Implications of Cyclical Unemployment
Cyclical unemployment can have severe effects on the economy. High unemployment during a recession can lead to reduced consumer spending, creating a negative feedback loop that further depresses economic activity.
Unemployment, especially cyclical, can lead to financial instability for individuals and families. Prolonged unemployment can increase poverty levels and contribute to social issues like depression and decreased morale.
Regarding governments, they often respond to cyclical unemployment by implementing fiscal and monetary policies. These can include stimulus packages, lowering interest rates, and increasing public spending to boost economic activity and reduce unemployment.
When the economy starts to recover, cyclical unemployment typically decreases as businesses begin to hire again to meet rising demand for products and services. Thus, it works just how the business cycle does.
Examples of Cyclical Unemployment
Let's take Bob for example. Bob is a construction worker who has been steadily employed during an economic expansion. However, when the economy enters a recession, demand for new construction projects declines, and his company is forced to cut back on staff. As a result, Bob loses his job—not because of his skills or performance, but because of the cyclical downturn in the economy. When the economy improves and construction demand picks up again, Bob is likely to find work as businesses start hiring once more. This period of unemployment is cyclical because it’s tied directly to the economic cycle.
The Bottom Line
Ensure that you understand cyclical unemployment and its implications. Chances are, although we do not want it to happen to us, we may go through a period in time where a recession could take our jobs from us. This is extremely unfortunate but has happened numerous times throughout our history, albeit in the U.S. or on a more global scale. Let's hope for the best!
Related Posts
