One of the primary causes of high unemployment rates is cyclical unemployment. It fluctuates with the economy and is especially high during recessions. Fortunately, this form of unemployment is usually transient, and employees can re-enter the labor force when the economy improves.
In this article, we’ll define cyclical unemployment, discuss the reasons for cyclical unemployment, how it is computed, and present examples of cyclical unemployment.
What is Cyclical Unemployment?
Cyclical unemployment occurs when labor forces are reduced as a result of business cycles or economic changes. If you are cyclically unemployed, it means that your employer has laid you off to conserve money during a period of slow business.
Cyclical unemployment is often short-term since it rises and falls with the markets, resulting in high levels during recessions and low levels during booms. The length of the recession, which might last six months to a year, determines how long you will be cyclically unemployed.
Examples of Cyclical Unemployment
Throughout history, cyclical unemployment has occurred when markets rose and fell. Here are four illustrations of cyclical unemployment:
#1. Great Depression
The housing business plummeted during the 2008 financial crisis. Borrowers were unable to pay their mortgages, many people were unable to obtain loans for new homes, and demand for new housing fell. As a result, new home construction has ceased. Unemployment rates rose more, fewer individuals could afford their mortgage payments, more homes were foreclosed on, and demand for development decreased even further.
Because of cyclical unemployment, real estate agents, architects, appraisers, loan officers, and almost two million construction workers lost their jobs during the Great Recession. However, as the economy recovered and home purchasers were able to obtain loans more easily, real estate values rose. The increased demand for home renovations and new building provided jobs for construction workers and other industry professionals.
#2. Automobile manufacturing
During recessions, such as the 2008 financial crisis, the automobile sector suffers. Vehicles are large purchases for most people, so when the economy is bad, people buy fewer cars. As customer demand falls, vehicle dealerships and manufacturers lay off workers since they don’t need as many. However, as the economy improves, demand rises and consumers resume purchasing automobiles, allowing auto workers to reclaim their jobs.
#3. Second World War
Mining and industrial occupations were in high demand during World War II, and employment rates in these areas were high. However, after the war, output slowed due to decreased demand for wartime machinery and products. In addition, a large number of persons returned from military service and were looking for work. These causes contributed to a brief recession and high unemployment rates, which were followed by a period of strong economic expansion a few years later.
#4. COVID-19
Because of the COVID-19 epidemic, the economy slowed significantly in 2020. Many companies were forced to temporarily close, and consumers who self-quarantined or followed stay-at-home directives purchased less products. Many organizations laid off staff as a result of business closures, reduced revenue, and decreasing buyer demand. In the spring of 2020, tens of millions of individuals applied for unemployment benefits in the United States. However, as businesses such as merchants and restaurants were allowed to reopen, they rehired workers to satisfy increased demand.
The Consequences of Cyclical Unemployment
Unfortunately, cyclical unemployment can slide downhill on its own. Because the newly unemployed have less disposable income, demand, and corporate revenue fall, resulting in even more layoffs.
Without action, this cycle will continue until supply falls to match the decreased demand. Unfortunately, this is unlikely to occur until unemployment exceeds 25%. This was the peak of unemployment during the Great Depression, which lasted a decade. While monetary interventions were enacted at the time, they were insufficient. It is widely acknowledged that the demand for military equipment and supplies when the United States entered World War II was what ultimately ended the Depression.
Calculating The Cyclical Unemployment Rate
The cyclical unemployment rate is the difference between the current rate (the total number of unemployed) and the natural unemployment rate (unemployment resulting from employees quitting or looking for work). It’s difficult to look at data and figure out why each person is out of work. To determine how much of the measured unemployment is cyclical, economists have developed three methodologies.
The first and most commonly used method makes use of the business cycle. Find the unemployment rate at the height of the business cycle to apply this strategy. Next, determine the unemployment rate at its lowest point. The difference between the two is the cyclical unemployment rate.
Cyclical Unemployment Rate = Unemployment Rate at Peak – Unemployment Rate at Trough
The cyclical unemployment rate is obtained by subtracting the structural, frictional, and seasonal unemployment rates from the aggregate unemployment rate.
The third way compares the unemployment rate for recent college graduates to the overall unemployment rate. If the recent graduate rate is comparable to the overall rate, then the majority of the country’s unemployment is cyclical. According to this logic, recent college grads have new abilities and can relocate to wherever the jobs are. They have an extremely low chance of experiencing structural unemployment. Using this strategy, researchers discovered that the majority of unemployment in 2011 was cyclical.
Solutions
Because cyclical unemployment can quickly spiral out of hand, the federal government is frequently forced to intervene. The first and most obvious response is expansionary monetary policy. The Federal Reserve (the Fed) may begin to cut interest rates or employ other novel measures to influence the economy.
Lowering interest rates reduces the cost of loans and credit card payments, which increases spending and is intended to boost market confidence. The fact that the Fed is acting may restore the confidence required to raise aggregate demand.
If that isn’t enough, the government must engage in expansionary fiscal policy. Because Congress must approve new federal funding, expansionary policies take longer to implement. This expenditure increases the budget deficit and reignites the bipartisan argument over whether tax cuts or spending creates more jobs.
Using Fiscal Policy to Reduce Cyclical Unemployment
The expansionary fiscal policy seeks to manage output and employment by boosting government spending while cutting taxation. Lower taxes result in higher levels of disposable income and increased consumption. An increase in consumption leads to an increase in aggregate demand and a rise in GDP. Firms will respond to increased demand and GDP by raising production, which necessitates the hiring of more people. As a result, cyclical unemployment will be reduced. Furthermore, when there is significant economic growth and increased aggregate demand, there are fewer job losses since businesses continue to operate.
During recessions, economist John Maynard Keynes advocated for expansionary fiscal policy. During a recession, idle resources (capital and labor) exist, according to Keynes. As a result, it is the government’s responsibility to create more demand and intervene to alleviate unemployment.
When interest rates fall, so do exchange rates, making exports more competitive.
Monetary Policy Expansion to Reduce Unemployment
Expansionary monetary policy aims to boost aggregate demand and economic growth by lowering interest rates. Reduced interest rates imply a reduced cost of borrowing. People spend more and invest more when it is easier to borrow money. This boosts aggregate demand and GDP while lowering cyclical unemployment. Furthermore, when interest rates fall, so do exchange rates, and an economy’s exports become more competitive.
Policymakers may also launch targeted efforts aimed at specific sectors of the economy in order to reduce unemployment and boost output. These innovative ideas include simplifying the approval process for government projects that create jobs, providing cash incentives to businesses for hiring people, and paying firms to train individuals for certain positions.
Other Types of Unemployment
Economists recognize four more major categories of unemployment that affect the overall unemployment rate of a population. Many of these types of unemployment might occur concurrently. Except for cyclical unemployment, all types of unemployment can exist in a stable or expanding economy.
#1. Frictional unemployment
People looking for new jobs produce frictional unemployment, which is a transient and voluntary sort of unemployment. It is the most prevalent sort of unemployment. The three types of frictional unemployment are as follows:
- Jobless people
- Those who are reentering the labor force
- Those making their initial foray into the labor force
Frictional unemployment denotes a period of transition in someone’s life. It is usually temporary because the individual is merely unemployed until they find new employment. This form of unemployment might be considered favorable if it indicates that the economy is stable or increasing and that individuals are looking for better opportunities.
#2. Institutional unemployment
When people are unemployed as a result of government and societal forces and incentives, this is referred to as institutional unemployment. Among the factors that can contribute to institutional unemployment are:
- High inimum wage legislation
- High rates of unionization
- Important social welfare programs
- Strict occupational licensing requirements
- Hiring practices that are discriminatory
The causes of institutional unemployment are frequently long-term or permanent.
#3. Seasonal unemployment
Seasonal unemployment occurs when the demand for specific jobs and talents varies from season to season. Some industries, such as skiing, are only operational for a portion of the year. This sort of unemployment solely impacts workers whose occupations are seasonally dependent. Here are several examples:
- Workers in the construction industry
- Teachers
- Instructors of skiing
- Lifeguards
- Farmers
- Retail employees
- Counselors at a summer camp
- Employees at a resort
Seasonal unemployment varies by industry and time of year.
#4. Structural unemployment
Long-term underlying issues and changes in the economy make workers unable to compete for jobs, which causes structural unemployment. It arises when the market’s supply and demand for available jobs and certain talents do not match. There are jobs available, but the population of people looking for work lacks the requisite skills to fill them.
When big technical developments affect an entire society and economy, structural employment occurs. Consider vehicles replacing horse-drawn carriages or automation replacing human manufacturing. When such developments occur, certain jobs become obsolete, and the individuals who work in them become unemployed. To find work, they frequently need to learn new skills.
Structural unemployment is long-term, chronic, and difficult to eliminate.
Which Country in the UK has the Highest Rate of Unemployment?
Wales
In the second quarter of 2023, the unemployment rate in the United Kingdom was 4.8 percent in Wales, 4.2 percent in England, four percent in Scotland, and 2.7 percent in Northern Ireland, the lowest percentage among the UK’s four countries.
What is the Cyclical Cause of Unemployment?
Cyclical unemployment occurs as economic activity fluctuates during the business cycle. During an economic downturn, a lack of demand for products and services results in a scarcity of jobs for people who wish to work.
Which Part of the UK has the Lowest Unemployment Rate?
The highest unemployment rate estimate in the UK for the three months ending February 2023 was in London (4.7%), and the lowest was in the South West (2.3%).
Is Cyclical Unemployment Good?
Individuals who lose their jobs or work fewer hours may have lower income, consumption, savings, self-esteem, and skills. These consequences may have long-term consequences for their employment opportunities, health, and well-being.
What is the Solution to Cyclical Unemployment?
To avoid cyclical unemployment, authorities should prioritize increasing output, which is most efficiently accomplished by raising demand. Expansionary fiscal policy aims to boost aggregate demand and economic growth by increasing government expenditure and cutting taxation.
In Conclusion,
The main cause of high unemployment rates is cyclical unemployment. It is the result of a business cycle. It’s a natural rise and fall in economic growth that happens over time. The length of economic contractions brought about by a recession determines the duration of cyclical unemployment. The average recession lasts about 18 months. When the business cycle returns to an expansionary phase (rising toward the top of the wave), the unemployed are more likely to be rehired.
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