Cyclical unemployment is a type of economic downturn that occurs regularly or periodically due to an overall downward trend in the business cycle. It is caused by the restrictions of demand in the market, which are usually due to recessions or depressions.
Examples of cyclical unemployment include seasonal layoffs, recessions that cause workers to be laid off due to a lack of demand for a company’s product or service, and structural changes in an industry that cause workers to be unable to find jobs.
Cyclical unemployment can last for months or even years, and the length of time depends on various economic factors. They may include the strength of government spending and how quickly businesses can restructure in response to the changing market.
Cyclical unemployment is also known as demand-deficient unemployment since it occurs when there is not enough aggregate demand in the economy to employ those seeking work.
Definition of Cyclical Unemployment
Cyclical unemployment is a type of unemployment that tends to occur during economic downturns, such as recessions or depressions. It occurs when the economy’s demand for goods and services falls below the number of available workers (Schneider, 2022).
Cyclical unemployment generally rises during recessions and depressions and falls during expansions. The reason is simple: when economic activity slows, companies tend to downsize and lay off workers — resulting in a rise in unemployment.
Cyclical unemployment, as economists explain it, is an outcome of businesses lacking the necessary demands for labor to employ every person who desires work at a given point in the business cycle (Sexton, 2019).
In simple words, cyclical unemployment is caused by an overall economic downturn but not by an individual’s inability to find a job.
10 Examples of Cyclical Unemployment
- Layoffs due to health crises: During the 2020 health crisis, economic activity worldwide decreased, leading to many companies laying off their employees to reduce costs.
- Reduction of staff due to plant closure: Many companies closed down their plants and factories during the recession, resulting in thousands of workers being made redundant. Consequently, the demand for labor decreased, and unemployment rose.
- Unemployment due to war or political conflicts: Wars and political conflicts hugely affect the economy. Since many companies struggle to stay afloat in a war-torn economy, workers are laid off due to the decreased demand.
- Reduced demand for labor due to decreased demand for goods: During recessions, consumers tend to increase their savings and cut down on expenses. This reason leads to a decrease in demand for certain goods and services, resulting in a decrease in the demand for labor.
- Construction workers laid off due to lack of building projects: During economic downturns, the demand for construction decreases significantly due to fewer people investing in real estate. It leads to the lay off of construction workers, increasing cyclical unemployment.
- Automotive workers laid-off during the recession: The automotive industry is greatly affected during recessions, as fewer people buy cars. As a result, automobile companies may reduce their workforce or lay off workers, leading to cyclical unemployment.
- High-tech employees laid off due to a decrease in service demand: During recessions, the demand for high-tech jobs may decrease as businesses focus on cutting costs. It may lead to a decrease in demand for high-tech professionals and an increase in cyclical unemployment.
- Workers laid off due to restructuring of the industry: To survive in a changing market, many companies may restructure their businesses. It can increase cyclical unemployment as some employees may be laid off due to restructuring.
- Job loss due to a decrease in export demand: During recessions, the demand for exports may decrease as consumers cut down on spending. As a result, some workers may be laid off due to decreased export demand.
- Increased unemployment due to government regulations: Government regulations can affect the economy significantly. If regulations are too strict, some businesses may be unable to operate, and employees may be laid off, leading to increased cyclical unemployment.
Cases of Cyclical Unemployment
1. The Great Recession
The Great Recession of 2008 is an example of cyclical unemployment. Companies went bankrupt, and businesses closed down, leading to increased unemployment worldwide.
Millions of workers lost their jobs and were unable to find new ones, resulting in a sharp rise in the rate of unemployment.
The 2008 financial crisis led to a devastating collapse of the housing industry. In addition, it led to a huge number of lay off s, both in the construction industry as well as in finance.
Banks and other financial institutions also decreased their workforce, leading to a decrease in the availability of jobs.
The recession also decreased consumer spending and investment, resulting in a decrease in demand for goods and services. It, in turn, led to a decrease in the demand for labor and an increase in cyclical unemployment (Pissarides, 2013).
2. National and Global Health Crises
Global health crises lead to the closure of businesses and factories, resulting in millions of people being laid off worldwide.
Furthermore, restrictions on movement due to health shutdowns can also cause a decrease in demand for labor, leading to an increase in unemployment.
Health crises have also significantly impacted the service sector, as many restaurants, bars, and hotels have been forced to close down due to decreased demand.
For example, in the initial months of 2020, a whopping number of people had no choice but to apply for unemployment in the United States.
Fortunately, with retail stores and eateries being allowed back up again, they were able to fill their positions again – thus allowing unemployed citizens to return to work (Barbieri Góes & Gallo, 2021).
3. World War II
The Second World War is another example of cyclical unemployment. The war effort caused many businesses to shut down or reduce their operations, resulting in a decrease in demand for labor.
As a result, workers were laid off, and cyclical unemployment increased.
The war also caused restrictions on imports and exports, leading to a decrease in demand for goods and services. It further increased cyclical unemployment as businesses could not find enough customers to sustain their operations.
In addition, the war decreased consumer spending and investment due to reduced disposable incomes. It further decreased the demand for goods and services, leading to increased unemployment (Tucker, 2022).
Frictional vs. Cyclical vs. Structural Unemployment
In economic theory, there are three main types of unemployment: frictional, cyclical, and structural. All of them can have a major impact on the economy, but they differ in their causes and effects.
- Frictional unemployment is caused by the natural process of people changing jobs or entering and leaving the labor force. This type of unemployment is usually short-term but can be prolonged if the job market is not robust (Schneider, 2022).
- Cyclical unemployment is caused by fluctuations in the business cycle, such as recessions and depressions. When the economy is not doing well, companies tend to reduce their operations or even shut down, leading to a decrease in demand for labor.
- Structural unemployment is caused by a sharp mismatch between the skills required to complete certain jobs and the skills of those who are looking for work. It can be caused by technological advances or the emergence of new industries (Schneider, 2022).
Effects of Cyclical Unemployment
The effects of cyclical unemployment can be devastating to any economy. It leads to a decrease in consumer spending, investment, and wealth which can have a long-term impact on economic growth.
Here are the five most common effects of cyclical unemployment:
1. Falling consumer demand
When people are unemployed, they have less disposable income to spend and invest. It leads to decreased demand for goods and services, resulting in lower production levels and increasing unemployment (Schneider, 2022).
2. Lower wages
As businesses cannot operate at full capacity, they tend to reduce wages to stay afloat. Unfortunately, lower wages mean less disposable income, further decreasing consumer demand and economic growth.
When there is a sharp decrease in demand for goods and services, prices tend to fall. This phenomenon, known as deflation, can lead to further economic problems as businesses cannot increase their prices (Wong & Chu, 2012).
As customer demand wanes, businesses will have to take drastic measures like lowering prices and implementing discounts to get shoppers back.
4. Increased poverty and inequality
Unemployment leads to higher levels of poverty and inequality, as lower-income individuals are more likely to be affected.
Individuals with high levels of education or specialized skills are more likely to find employment during such economic downturns. Thus, the gap between the wealthy and the poor is further exacerbated.
5. Decreased productivity
An increase in unemployment leads to decreased productivity as fewer people are available to work. In addition, as consumer demand for goods is decreasing, businesses are hard-pressed to find new ways of generating income (Elsby et al., 2009).
To stay afloat, most companies opt to minimize their costs rather than invest in innovative technologies that could help them increase profits.
Cyclical unemployment is a type of unemployment that is caused by fluctuations in the economy. For example, it may be caused by recessions, depressions, or other economic crises.
For example, during the Great Recession of 2008, housing prices fell, and banks tightened credit requirements. It further decreased the demand for goods and services, leading to increased unemployment.
Cyclical unemployment has far-reaching effects on an economy. It can lead to decreased consumer demand, lower wages, deflation, increased poverty and inequality and decreased productivity.
Therefore, understanding the causes and effects of cyclical unemployment can help policymakers and businesses devise solutions to avoid an economic crisis.
Barbieri Góes, M. C., & Gallo, E. (2021). Infection Is the Cycle: Unemployment, Output and Economic Policies in the COVID-19 Pandemic. Review of Political Economy, 33(10260), 1–17. https://doi.org/10.1080/09538259.2020.1861817
Elsby, M. W. L., Michaels, R., & Solon, G. (2009). The ins and outs of cyclical unemployment. American Economic Journal: Macroeconomics, 1(1), 84–110. https://doi.org/10.1257/mac.1.1.84
Pissarides, C. A. (2013). Unemployment in the Great Recession. Economica, 80(319), 385–403. https://doi.org/10.1111/ecca.12026
Schneider, G. E. (2022). Macroeconomic principles and problems. Routledge.
Sexton, R. L. (2019). Exploring macroeconomics. Thousand Oaks Sage Publications.
Tucker, I. B. (2022). Economics for today. Cengage Learning Inc.
Wong, A., & Chu, M. (2012). Dynamics of deflation and unemployment: Fall into an abyss of depression. Recession and Its Aftermath, 47–66. https://doi.org/10.1007/978-81-322-0532-6_3