Cyclical unemployment is the result of slow economic activity and recession in the country, which eventually results in a reduction in the labor force. It can be critical for the long-term progress of the market. When cyclical unemployment is heightened, the country experiences low expansion, low GDP, and recurring job layoffs.
Are you trying to understand the concept of cyclical unemployment but don’t know where to start? Here is a complete guide on cyclical unemployment, its causes, examples, and how it is different from other types of unemployment.
About Cyclical Unemployment
Simply put, cyclical unemployment is the type of unemployment that is caused by the reduction of labor forces, which may be a result of fluctuations in the business cycle or economy. The popular term used for such type of unemployment is laying off by the employer. It is because the company is trying to save money during the time of slow business.
Typically, cyclical unemployment levels are only for a short term because they fluctuate with the market trends, for instance, during recession and low expansions. It usually declines with economic expansions, which may come after six months or one year of recession. Cyclical unemployment can also add up to the total unemployment, including frictional, seasonal, and structural.
Understanding Cyclical Unemployment Through Examples
Cyclical unemployment is directly proportional to economic irregularities and is measured by the gross domestic product GDP within the business cycle. Economists usually describe this unemployment as the result of businesses not having enough means and demand for labor, reducing their production supply. Let us understand cyclical unemployment through a few examples.
Great Recession
The 2008 Great Final Crisis resulted in the collapse of the housing industry across the USA. During this period, borrowers across the country were unable to pay their debt or get loans for their new homes. The increased unemployment rates resulted in people not being able to pay their mortgage payments, resulting in homes undergoing foreclosure.
Covid-19
Similarly, the 2020 COVID-19 pandemic also resulted in the slow economic activity. During this time, many businesses were forced to shut down temporarily, following the self-quarantining of consumers and stay-at-home government orders.
The company’s closure, reduced revenue, and low demand resulted in many businesses laying off their employees. According to popular statistics, tens of millions of people were laid off alone in the USA during 2020.
How Does the Government Deal with Cyclical Unemployment?
Usually, when a country is experiencing a cyclical unemployment cycle, the first thing the government does is adopt an expansionary monetary policy. In this policy, the central banks create money to buy government securities from the market, which eventually reduces the interest rates and improves the flow of money supply. In return, the somewhat stable economic conditions trigger financial institutions to promote lending to improve the money supply.
How is Cyclical Unemployment Calculated?
Calculating the cyclical unemployment rate is pretty easy. Here is how you can calculate it.
- The formula for calculating cyclical unemployment is Cyclical Unemployment Rate = Current Unemployment Rate – (Frictional Unemployment Rate + Structural Unemployment Rate).
- The current unemployment rate means the total number/ percentage of workers who are unemployed. Hence, Current Unemployment Rate = (Number of Unemployed Workers / Total Labor Force) x 100.
- The frictional unemployment rate is the percentage of the total workers who are voluntarily moving from one job to another, unlike the popular trend in cyclical unemployment. The formula for Frictional Unemployment Rate = (Workers Actively Looking for Jobs/ Total Labor Force) x 100.
- The structural unemployment rate is the percentage of the total labor force that is involuntarily unemployed because of the long-term damage to the economy (due to structural changes). The formula for Structural Unemployment Rate = (Number of Structurally Unemployed Workers / Total Labor Force) x 100.
Cyclical Unemployment Vs. Other Unemployment Types
Cyclical unemployment is unique in a way that it influences other unemployment and adds up to the total unemployment rate. Let us discuss each of the other unemployment types in contrast to cyclical unemployment.
Institutional Unemployment
As the name suggests, institutional unemployment occurs because of governmental or institutional factors. For instance, the new development plan introduces high minimum wage laws or high union rates, strict occupational licensing laws, or discriminatory hiring. The source and impact of this type of unemployment is permanent or lasts for a long time.
Seasonal Unemployment
Seasonal unemployment happens when the demand for a few jobs or skills changes from season to season. For instance, the ski industry only operates during one season and generates limited employment. Some other examples include construction workers, teachers, farmers, lifeguards, and resort workers.
Frictional Unemployment
Frictional unemployment happens when people voluntarily leave one job on a temporary basis. It is the most common type of unemployment and entails workforce like job leavers, people re-entering the workforce, or people entering the workforce for the first time. It is for a short time and is usually considered positive, as it suggests the stability of the economy.
Structural Unemployment
As the name suggests, structural unemployment results from long-term changes in the economy, reducing the overall job opportunities for the workforce. It typically occurs when the supply and demand across the job market do not match. Though jobs may be available for people, the popular do not necessarily have the right skills to fill them up, like automation replacing human manufacturing.
Is frictional unemployment positive?
Yes, frictional unemployment is usually positive, as it indicates the stability of the economy and people looking for better jobs.
How to calculate cyclical unemployment?
The formula for cyclical unemployment is Current Unemployment Rate – (Frictional Unemployment Rate + Structural Unemployment Rate).
How do we derive the current unemployment rate in the country?
The current unemployment rate in the country is (Number of Unemployed Workers / Total Labor Force) x 100.
In essence, like any other unemployment, cyclical unemployment is critical for the country’s growth. It usually triggers when the economy is already worsening, and the governments are unable to restore the money flow across the market. I hope this guide has been helpful for those trying to understand the unemployment caused by the recession.