Do you know what cyclical unemployment is and why it is considered to be the most severe type of unemployment?
Let’s begin by saying that cyclical unemployment is usually caused by the contraction phase of the business cycle. Also, it creates massive unemployment. Without work, individuals cannot make money. Therefore, they have less money to buy the goods and services they need. Well, over 70% of what the U.S. economy produces comes from domestic consumers.
And as you know, usually, if a company is trying to cut costs, one of the cost-saving measures they take is to reduce its workforce. This action lowers further the demand as more individuals lose their jobs.
In short, cyclical unemployment causes the layoff of a large number of workers. To be precise, this is exactly the reason why experts believe this type of unemployment is the most severe one.
What is Cyclical Unemployment?
Typically, in a recession, most companies cut back on hiring new labor. This initially leads to a higher unemployment percentage due to the reduced number of job vacancies.
However, in our case, cyclical unemployment doesn’t necessarily occur due to an actual recession. Even though a real recession is when the economy has a negative growth of two or more quarters in a row, it may not be enough for cyclical unemployment to occur.
According to experts in this field, cyclical unemployment can be defined as a type of unemployment that occurs due to a period of negative economic growth or economic slowdown. Or in other words, when there are job losses during downturns and contractions in the business cycle, then we can talk about cyclical unemployment.
Imagine the following. There is low consumer demand, which leads to cyclical unemployment. Similarly, when the demand falls, companies lose profit. If the company doesn’t expect better sales percentage and higher demand in the near future, then they must lay off workers.
On the one hand, this leads to more individuals who are jobless and, of course, higher unemployment. However, on the other hand, higher unemployment causes consumer demand to drop even more.
So, this repeating pattern is the reason why experts call it cyclical unemployment. The result? Large-scale unemployment, low consumer demand, and adverse economic consequences.
Moreover, during the cyclical unemployment period, the number of jobs is fewer than the number of applicants. To be more precise, experts use the term demand-deficient unemployment. If wages are too high and if the minimum wages are higher, then demand-deficient unemployment may occur.
Duration of Cyclical Unemployment
Usually, cyclical unemployment has a long term duration. The initial cause, in this case, is unemployment. Moreover, the consequence is also unemployment. It’s not a surprise that this leads to a vicious circle that to could last a long time.
Causes of Cyclical Unemployment
As we have already mentioned, one of the causes of cyclical unemployment is low consumer demand. Typically, lower consumer demand means that the need for both goods and services has dropped. Naturally, when this happens, we can observe a reduction in production too. On the other hand, this leads to lower or no need for workers for specific job positions. And as companies attempt to maintain their profit margins, the layoff of workers won’t stop.
But in short, a fundamental imbalance within the economy is the cause of cyclical unemployment. Also, irregularities in labor supply and demand across sectors and skill groups can be noticed. Usually, the number of jobs in the economy is lower than the number of individuals who are looking for a job. So, even if all the available job positions get filled, there will still be people who won’t be able to get a job.
Examples of Cyclical Unemployment
The financial crisis of 2008 is one of the best examples of cyclical unemployment. During December 2007 and October 2009, the official unemployment rate increased from 5.0% at the recession’s outset to a peak of 10.0%. As you can see, the unemployment rate doubled.
Moreover, the 10.0% peak appeared in October 2009, which is four months after the recession’s official end in June 2009. In 2012, three years later, the unemployment rate averaged 8.1%.
Another example is cyclical unemployment during the Great Depression of 1929. In fact, this is probably one of the biggest and best examples of this type of unemployment. Back in 1929, the unemployment rate was estimated to be as high as 40%. For those who are not into history, we would like to note that the Great Depression happened after an immense economic growth period.
Of course, there are many other examples of cyclical unemployment, but we believe that these two are the best examples of cyclical unemployment.
When it comes to the impact of unemployment, there are both positive and negative effects. In this article, we will focus only on the adverse effects because we believe they are essential. So, what are the adverse effects cyclical unemployment has on individuals and society? Let’s take a look.
- Due to the lack of income sources, many individuals may find themselves in difficult financial situations.
- Being unemployed when you want to work can lead to serious health issues such as depression, low self-esteem, anxiety, tension, as well as other mental health issues.
- Due to the high unemployment rate and the lack of income, the burden of debt will increase, which leads to alarming economic problems.
- All of the effects mentioned above lead to poverty.
- As unemployment rates and poverty increase, crime rates tend to rise too.
The Solution of Cyclical Unemployment
Even though cyclical unemployment is the most severe type of unemployment, there is also a way to help the economy to recover. When there is cyclical unemployment, the state and the federal governments have to intervene.
For instance, by increasing the GDP of the country, they can stop the cyclical unemployment. Moreover, by creating new jobs, the government can accumulate money in the form of debt and end the negative. Also, the new government jobs will generate more spending, which, on the other hand, will create more private jobs.