Cyclical unemployment is the component of overall unemployment that results directly from cycles of economic upturn and downturn. 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 utilization of various policy tools by governments to stimulate the economy.
Key Takeaways
- Cyclical unemployment is influenced by economic recession or expansion on the total unemployment rate.
- It generally rises during recessions and falls during economic expansions, making it a major focus of economic policy.
- Cyclical unemployment is one factor among many contributing to total unemployment, including seasonal, structural, frictional, and institutional factors.
Understanding Cyclical Unemployment
Cyclical unemployment relates to the irregular ups and downs, or cyclical trends in growth and production, as measured by the gross domestic product (GDP), that occur within the business cycle. Most business cycles eventually reverse, with the downturn shifting to an upturn, followed by another downturn.
Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work at that point within the business cycle. When demand for a product or service declines, there can be a corresponding reduction in supply production to compensate. As supply levels are reduced, fewer employees are required to meet the lower standard of production volume. Consequently, those who are no longer needed will be released by the company, resulting in their unemployment.
When economic output falls, the business cycle is low, and cyclical unemployment will rise. Conversely, when business cycles are at their peak, cyclical unemployment tends to be low because there is a high demand for labor.
Example of Cyclical Unemployment
During the financial crisis in 2008, the housing bubble burst and the Great Recession began. As more borrowers failed to meet their debt obligations associated with their homes, and qualifications for new loans became more stringent, the demand for new construction declined.
With the overall number of unemployed climbing, and more borrowers unable to maintain payments on their homes, additional properties were subject to foreclosure, driving demand for construction even lower. As a result, approximately 1.5 million workers in the construction field became unemployed. This rise in unemployment was cyclical.
As the economy recovered over the following years, the financial sector returned to profitability and began to make more loans. People started buying homes again or remodeling existing ones, causing real estate prices to rise once more. Construction jobs returned to meet this renewed demand in the housing sector, and cyclical unemployment declined. Multiple types of unemployment often exist at the same time.
Cyclical vs. Other Types of Unemployment
Cyclical unemployment is one of the main classes of unemployment as recognized by economists. Other types include structural, seasonal, frictional, and institutional unemployment.
Structural Unemployment
Structural unemployment is caused by fundamental shifts in the makeup of the economy—for example, jobs lost in the buggy-whip sector once automobiles came to dominate. It represents a mismatch between the supply and demand for certain skills in the labor market.
Frictional Unemployment
Frictional unemployment is short-term joblessness caused by the process of leaving one job to start another, including the time needed to look for a new job. It naturally occurs even in a growing, stable economy and is actually beneficial, as it indicates that workers are seeking better positions.
Institutional Unemployment
Institutional unemployment consists of the component of unemployment attributable to institutional arrangements, such as high minimum wage laws, discriminatory hiring practices, or high rates of unionization. It results from long-term or permanent institutional factors and incentives in the economy.
Seasonal Unemployment
Seasonal unemployment occurs as demands shift from one season to the next. This category can include workers whose jobs depend on a particular season. Official unemployment statistics will often be adjusted to account for seasonal unemployment. This is known as a seasonal adjustment.
For example, teachers may be considered seasonal, based on the fact that most schools in the U.S. cease or limit operations during the summer. Similarly, construction workers living in areas where construction during the colder months is challenging may lose work in winter. Certain retail stores hire seasonal workers during the winter holiday season to better manage increased sales, then release those workers after the holidays when demand lessens.
Special Considerations
In most cases, several types of unemployment exist at the same time. With the exception of cyclical unemployment, the other classes can occur even at the peak ranges of business cycles, when the economy is said to be at or near full employment.
How Is the Rate of Unemployment Calculated?
The U.S. unemployment rate is calculated by dividing the number of unemployed persons by the number of persons in the labor force (employed or unemployed) and multiplying that figure by 100.
What Is Considered a High Rate of Unemployment?
Unemployment rates that reach 10% are considered high. During the height of the COVID-19 pandemic, the unemployment rate reached 14.8%.
What Is the Difference Between Unemployment and Underemployment?
Underemployment is a measurement of the number of laborers in an economy who are unwillingly working in low-skill and low-paying jobs, in addition to those only working part-time who are unable to secure full-time jobs.
Related Terms: economic cycle, recession, economic expansion, structural unemployment, frictional unemployment, seasonal unemployment, institutional unemployment.
References
- U.S. Bureau of Labor Statistics. “Monthly Labor Review: The 2007-2009 Recession: Construction: Construction Employment Peaks Before the Recession and Falls Sharply Throughout It”, Page 1.
- U.S. Bureau of Labor Statistics. “Labor Force Statistics From the Current Population Survey”.
- Maryville University. “8 Types of Unemployment: Understanding Each Type”.
