What is cyclical unemployment?
Cyclical unemployment is a specific type of unemployment that occurs as a consequence of fluctuations in the business cycle or economic shifts, such as recessions characterized by economic downturns. During periods of robust economic growth or expansion, the incidence of cyclical unemployment is typically low. This is because increased sales and income generate greater demand for goods and services, necessitating a larger workforce to meet the demand.
The other way around, during a recession, the rate of cyclical or involuntary unemployment rises significantly. This is due to a decline in consumer demand for goods and services, leading to a reduction in production. Consequently, businesses require fewer workers, resulting in job layoffs. The number of individuals seeking employment surpasses the available job vacancies within the labor market.
Cyclical Unemployment Explained
Cyclical unemployment occurs due to fluctuations in the business cycle, where changes in demand lead to adjustments in supply, resulting in layoffs and unemployment. During a recession, demand for goods and services drops, causing companies to cut their workforce and increasing cyclical unemployment. As the economy gradually recovers, businesses may be long-term delayed in re-hiring employees, resulting in a delayed reduction in the unemployment rate. Cyclical unemployment is temporary and fluctuates with different phases of the business cycle.
During the contraction phase of the business cycle, aggregate consumer demand falls, leading to an increase in unemployment. However, as the contraction phase ends and the economy enters the expansion phase, consumer demand increases, leading to a drop in the unemployment rate. This dynamic illustrates the cyclical nature of unemployment and the solutions that can be taken during different phases of the business cycle.
It is important to note that a recession is generally defined as two consecutive quarters of negative economic growth, while an expansion is characterized by two consecutive quarters of positive economic growth. These phases of the business cycle contribute to changes in the level of cyclical unemployment in the economy