Cyclical Unemployment

What Is Cyclical Unemployment?

Cyclical unemployment is joblessness produced by the economic cycle's ups and downs. "Unemployed" refers to those who are employable and actively seeking work yet cannot find it.

Unemployment is one of the indices of a country's economic health, and it is commonly calculated by dividing the entire workforce by the number of jobless.

When the economy is in a recession, the growth of many industries slows, sales and earnings decline, firms' needs for workers fall, and unemployment rises. Then, as the economy expands, unemployment falls, which is crucial.

Simultaneously, high unemployment is mainly owing to this type of unemployment. Three causes can contribute to it. The first is a downturn in the economy. The business cycle is the second cause. Finally, the stock market crash triggered the third reason. 

This can lead to deflation, which means fewer products, increased unemployment, decreased demand for goods and services, and lower expenditure.

These are some of the potential outcomes of this type of unemployment. However, the implications and impact are primarily short-term and will progressively fade as the economy improves.

There are several examples of this type of unemployment in our daily lives. These include World War II, the Great Recession, and the COVID-19 pandemic. Each of these eras had one or more instances. 

Addressing this kind of unemployment is generally necessary since it has numerous harmful consequences. To combat it, the government can use expansionary fiscal and monetary policies to boost output and demand, also known as (GDP). 

At the same time, it's important to remember that cyclical unemployment is just one of several types of joblessness. 

Comparing it to different types of unemployment, such as structural, frictional, institutional, and seasonal unemployment, can give us a more in-depth understanding of the topic.

What are the causes of high cyclical unemployment?

The portion of total unemployment that is directly related to economic ups and downs is known as cyclical unemployment. In general, unemployment increases during recessions and decreases during periods of economic expansion.

One of the main purposes of studying economics and the objective of the several policy instruments that governments use to boost the economy is to minimize cyclical unemployment during recessions. The causes are discussed below.

Recession

A recession or a period of negative economic growth can result in it. 

In economics, a recession is defined as a severe drop in a region's overall economic activity. Conversely, recessions frequently arise when consumer spending falls.

When the economy is experiencing a sort of negative growth, people's demand for products and services declines, resulting in a decrease in employment because of rising layoffs. 

Because workers are also customers, layoffs may diminish demand for goods and services, resulting in additional job losses.

Business Cycle

The business cycle is a sequence of economic expansion and recession stages. The four stages of the business cycle are expansion, peak, contraction, and expansion.

Demand for goods and services decreases over time in this business cycle. 

The production also falls when demand falls, causing a company to reduce its need for workers, resulting in layoffs to maintain normal operations. 

After that, the unemployment rate declines as businesses recover and possibly resume hiring, which is relatively significant.

Stock Market Crash

The reason for this is that the stock market occasionally crashes. A catastrophic market fall can cause panic and a loss of trust in the economy, which can, in theory, lead to a recession.

As a result, the company's net value will decrease as stock prices fall. When a company's assets decline, it must lay off people to keep the business afloat, resulting in cyclical unemployment.

effects Of Cyclical Unemployment

There are detrimental effects of cyclical unemployment on people as well as society. Individuals may experience decreases in their income, consumption, savings, self-esteem, and abilities as a result of job loss or work reduction.

Long-term consequences for their well-being, health, and job prospects may result from these effects. In terms of society, cyclical unemployment can result in decreased productivity, decreased tax income, increased government spending, increased budget deficits, increased public debt, decreased innovation, and decreased social cohesiveness.

These consequences may impede the nation's ability to recover economically and grow.

The effects can be seen in the form of:

1. Deflation: When unemployment rises, consumer demand falls because of lower disposable income. Conversely, retailers may lower prices to entice customers back as consumer demand declines, resulting in short-term deflation.
2. Trading volume on the stock market fell: Because of cyclical unemployment, fewer equities are traded, which will negatively influence the economy as a whole. On the other hand, because equities can help with capital raising, liquidity, and investment, these vital functions are the hallmarks of capitalism, as they enable our economy to grow constantly.
3. Lower production: When this type of unemployment strikes, consumer demand plummets. When consumer demand is lower, it typically results in lower profits for enterprises. As a result, rather than investing in machinery and capital, corporations are attempting to decrease expenses through measures such as layoffs. 
   • This will result in productivity being at an all-time low. 
4. Massive unemployment: When consumer demand for goods and services falls, businesses' demand for labor falls along with it, resulting in industry-wide layoffs and many laid-off employees.
5. Decreased spending: Consumers will lower their expenditures to preserve their standard of living during cyclical unemployment. This is because recessions can lead to the erosion of consumer purchasing power. 
   • When consumer confidence is low, consumers often put off major purchases, such as buying a home, to conserve their savings by managing their significant expenses.
6. Falling demand for goods and services: Because people are not receiving additional income to meet their needs, it usually means that they will spend less. This leads to lower demand for goods and services provided by businesses, which means that fewer workers are needed.
   • Thus, unemployment results in a lower order, which leads to higher unemployment.

Is it long-term?

In most cases, it isn't a long-term occurrence. 

When a recession arises, it can last months or even years, which can negatively affect an economy.

However, after the economy improves through fiscal and monetary stimulus measures, unemployment will eventually decrease and revert to regular economic activities. 

Among these, the duration of cyclical unemployment is determined by the speed with which the economy recovers.

Examples Of cyclical Unemployment

Some of the notable points we discuss here, where society and individuals experienced cyclical unemployment are the WW-II, Financial Crisis of 2008, and the COVID-19 Pandemic.

The following examples can be considered for a better understanding

World War II

During WWII, the country's demand for mining and manufacturing was extremely high, resulting in a high employment rate in these industries and the integration of more people into these industries. 

When WWII ended, production of core goods such as mining and manufacturing slowed down due to lower mining and manufacturing demand. Additionally, many soldiers returned to civilian life because they needed to work. 

This led to cyclical unemployment because there was an increase in labor supply and reduced demand for core goods such as mining and manufacturing.

For those reasons, there was a brief period of recession with substantial unemployment. However, the economy and unemployment rate reverted back to the normal range as time passed.

The Great Recession

As the real estate market collapsed during the 2008 financial crisis, demand for new homes decreased as individuals lost their jobs and life savings. This has hit the construction industry as demand for new dwellings dwindles as people run out of savings to afford them, so new homes are not being built.

As companies stop building new homes, fewer people are hired, increasing unemployment rates.

Many people lost their jobs during the Great Recession, including real estate agents, architects, appraisers, and loan officers. The estimated loss in the construction sector was two million construction workers. 

Not only did the housing market contribute to the financial crisis, but it also had a role in the broader economic collapse. 

According to the National Bureau of Economic Research,  the total economy peaked in December 2007, with a slight drop in overall economic activity - this was the commencement of the recession. Shortly after, financial market stress peaked in the fall of 2008, which snowballed into a severe recession.

This has been the worst recession since World War II. The US gross domestic product decreased by 4.3 percent from peak to trough. It also lasted the longest, at 18 months. Unemployment has more than doubled, rising from less than 5% to 10%.

When the recession officially ended in the second quarter of 2009, builders began to build new homes as the economy recovered and demand for homes soared, driving property prices. Subsequently, unemployment started to decline.

The COVID-19

The COVID-19 pandemic has caused various economies to stagnate, such as the US and UK.

For example, almost all industries in the United Kingdom have been impacted, but some have been hurt more than others.

The severely damaged industries are those that rely on personal connection or travel. This covers lodging, dining, air travel, and non-food retail. 

In the second quarter of 2020, sales in the hotel, food and beverage, arts, entertainment, and entertainment sectors are predicted to drop by roughly 80% from typical levels.

Oil prices have also significantly impacted the production and distribution of fossil fuels.

Food and medical product manufacturers, merchants, other health-related services, research, and utilities have not been as hard hit as other businesses.

As consumers are forced to self-quarantine at home, demand for goods and services has plummeted. Many businesses have been forced to close temporarily due to the pandemic's severe impact.

Many businesses have laid off staff due to the dual pressures of decreased revenues and falling demand for goods, and many people have lost their jobs due to downsizing.

For instance, Maersk, the world's largest shipping company, announced on October 13, 2020, that they would fire at least 2,000 jobs as part of a restructuring. According to the corporation, the changes might affect up to 27,000 employees or almost a third of its global staff.

As the economy improves over the next few years, the situation will gradually improve, and the unemployment rate will decrease as consumer demand and business income rise.

determining the cyclical unemployment rate and solving It

When calculating the rate, we can remove the frictional and structural unemployment rates from the present unemployment rate.

Cyclical unemployment rate = current unemployment rate - (frictional unemployment rate + structural unemployment rate)

How does the government address the issue of cyclical unemployment? 

Policymakers should focus on increasing output to prevent and address it, and stimulating demand is the most effective way. This usually refers to expansionary monetary and fiscal policies.

Expansionary Monetary Policy

Expansionary monetary policy increases the rate at which money is supplied within an economy, which will increase the supply of money (i.e., new printed money) and impact the aggregate demand and supply of cash to achieve full employment and economic growth. 

It lowers interest rates by increasing the money supply in the economy, resulting in lower borrowing costs for businesses and consumers.

When borrowing money is easy, people spend and invest more. As a result, aggregate demand and GDP will increase while cyclical unemployment will decrease. 

Furthermore, the currency rate decreases when interest rates fall, making an economy's exports more competitive.

Expansionary Fiscal Policy

Expansionary fiscal policy is a type of policy in which the government uses financial distribution operations to encourage and enhance overall social demand. 

This fiscal allocation can increase and stimulate total social demand through tax cuts, increased spending, and subsequent expansion of the budgetary deficit. 

Reduced taxes result in more disposable income and increased consumption. Higher aggregate demand and gross domestic product (GDP) will result in more consumption.

Firms will respond to growing demand by raising production, which will need the hiring of additional workers. As a result, unemployment is expected to decrease.

To reduce unemployment and boost output, authorities may implement targeted initiatives directed at specific areas of the economy. For example, they are expediting project approvals and providing incentives to staff in specialized industries.

Cyclical vs. Other Types of Unemployment

Structural, frictional, institutional, and seasonal unemployment are the types of unemployment usually discussed. These types have their own indicators and time they may occur. The other types of unemployment are discussed below.

Structural Unemployment

Structural unemployment, a long-term form of unemployment, is a fundamental change in the economy exacerbated by external factors like technology, competition, and government policies.

Typically, certain businesses expand while others contract, resulting in job losses in the contracting ones. To obtain new occupations, such employees must be retrained or moved.

For example, when the automobile was introduced, carriage master jobs were substantially reduced, and former carriage masters faced structural unemployment. To obtain work, they must either learn new skills or relocate from where they now reside.

Frictional Unemployment

Frictional unemployment is defined as short-term joblessness caused by the process of some people deciding to leave their current job and seek employment elsewhere, including the time it takes to find a new job.

Frictional unemployment is a natural part of the economy, and it can be beneficial because it indicates that people are looking for better jobs.

For example, a person who majored in electronic and electrical engineering might have had a less-than-ideal profession. As a result, they intend to pursue a career as a software developer. In this case, frictional unemployment occurs due to the search for software engineer jobs.

Institutional Unemployment

Unemployment generated by government, social forces, and incentives is referred to as institutional unemployment. These are just a few examples of discriminatory hiring, high minimum wage legislation, and high unionization rates.

Seasonal Unemployment

Seasonal unemployment occurs when demand for labor varies according to the seasons in certain activities or sectors. Any worker whose job is dependent on the season can fall into this group.

For example, the need for culinary and housekeeping employees is higher in the hotel industry during peak seasons. However, those recruited during the peak season may suffer seasonal unemployment once the off-season begins, as hotels do not require as many employees.

Free Resources

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