What Is Cyclical Unemployment? (With Causes And Effects)

Updated 30 September 2022

When there is a loss of jobs because of a downturn in an economy, it creates cyclical unemployment. This type of unemployment is temporary, as it is an outcome of recurrent trends in business cycles. Learning about the correlation between an economy experiencing a period of inflation and recession and cyclical unemployment can help you better understand the job market. In this article, we answer the question, 'What is cyclical unemployment?', explore its various causes, outline some of its effects and share a few examples.

What Is Cyclical Unemployment?

The answer to the question, 'What is cyclical unemployment?' is that it is a type of unemployment where companies lay off some of their employees to save money during a period of slow business. This type of unemployment becomes a common occurrence when there is a decline in the expansion of an economy. Given there is inflation, the demand for products and services also decreases. In such situations, a company's requirement for employees is also lower because underwhelming demand leads to reduced profitability. The demand further plummets with employees losing their jobs and buying fewer goods.

Cyclical unemployment first affects those employees that a company may not require for its core functions, like part-time, seasonal or entry-level professionals. When cyclical unemployment is high, a market has more unemployed professionals than the number of available jobs. The length of the recession decides the duration of a professional's cyclical unemployment. To resolve this issue, governments may take several steps to help the economy prosper again. They may develop and implement policies like stimulus packages to promote growth during a recession. When an economy flourishes again, companies hire more employees to meet the demand.

Related: What Is A Business Cycle? (Definition And Important Stages)

Causes Of Cyclical Unemployment

A fundamental imbalance within an economy is the source of cyclical employment. This instability results in less demand, negative multiplier effects and a market crash. Lower business productivity may often lead to a stock market crash, which means consumers are losing confidence in the economy. An economy stops supporting the job market, which compels employers to lay off their employees. Since this pattern is common for all employers during a recession period, it becomes difficult for professionals to find new jobs. During the cyclical unemployment phase, there are more skilled professionals who seek employment than there are jobs available.

Related: What Is A Stock Option? (With Definition, Types And Benefits)

Effects Of Cyclical Unemployment

The peak of cyclical unemployment gives rise to:

  • Low production: The demands of consumers are drastically low during cyclical unemployment, which results in fewer production activities across industries.

  • Less demand for services: The rising inflation makes services costlier and consumers stop using those services.

  • Large-scale loss of jobs: When demand for goods and services is low, companies decrease production and do not require a large number of employees, resulting in mass layoffs across industries.

  • Reduced spending: The phase of cyclical unemployment results in low consumer confidence where buyers refrain from making purchases, especially the significant ones like buying a home.

  • Lower stock market volume: Stock market trading is one of the primary factors that affect cyclical unemployment since company stocks are available for less value, which negatively affects the overall economy.

Related: What Are The Causes Of Inflation? (With Pros And Cons)

Factors That Mitigate Cyclical Unemployment

Here are some of the factors that may help mitigate the effects of cyclical unemployment:

  • Increased consumer confidence: Buyers who have purchasing power start making purchases again. This may include asset items like stocks and bigger purchases, like homes.

  • Escalated production: When there are transactions happening in the market, industries see increased demand for goods and services. This factor facilitates a gradual increase in production again.

  • Government programmes: The aid from the government may support the growth of an economy. This involves various programmes, like stimulus packages for businesses or expansionary fiscal policies.

  • Reduced interest rates: When a government lowers the rates of interest, it improves cash flow in financial institutions. People start taking loans and spending that money for various purposes, improving the market conditions.

Related: What Is The Full Form Of GDP? (Definition And Calculation)

Examples Of Cyclical Unemployment

Here are some examples of cyclical unemployment that were a result of major recessions:

1929 stock market crash

Manufacturing of consumer goods experienced splendid growth between 1920 and 1929. After this decade, there were several unstable financial trends. These trends were mostly a result of excessive stock purchasing. This quickly diminished stock prices, as people were more inclined to sell their stocks and get their money back. The prosperous public stocks of businesses were soon worth almost half of their previous wealth.

The next decade offered some relief to the industries, but there was unprecedented unemployment that affected the country's job market for several years. Businesses laid off their employees and a huge number of people were without jobs. Also referred to as The Great Depression, this was a challenging period of high cyclical unemployment.

Related: Macroeconomics: A Complete Guide (With History And Scope)

2008 recession

Something similar to The Great Depression happened again in 2008. This recession resulted in high cyclical unemployment because of the disruption of the housing market. During this time, people were able to secure loans easily, causing housing prices to rise. There were many people who were not able to pay the loan amount back and this debt delivered another financial crisis. Now, it was difficult for people to get loans and given these circumstances, the development of new houses and remodelling virtually stopped. This resulted in many professionals in the field of construction losing their jobs.

Structural unemployment was also a significant part of this financial crisis, also referred to as The Great Recession. Factories started adopting computerised processes for production. This further caused skilled professionals to lose their jobs.

Automotive industry

Upheavals in the automotive industry are an apt example of cyclical unemployment, as this instability in the car market becomes common during recessions. Vehicles are a necessity for most individuals who travel to and from work. When there is an economic crisis, the demand for cars also decreases. This results in car manufacturers and dealerships laying off their employees, as production becomes limited. It is only when the sector experiences demand again, that automobile manufacturers and car showrooms start offering jobs.

World War II

The turmoil of World War II was beneficial for the professionals working in the mining and manufacturing sectors. Jobs in these fields were readily available, making employment rates in these industries high. After the war ended in 1945, production slowed down, as there was less demand for wartime machinery and other related products. Adding to this were soldiers and other professionals, who now returned to their home countries, seeking new roles. All these developments resulted in a short recession and high rates of unemployment, but the situation soon turned into a period of pronounced economic growth.

Related: Types Of Economists: Work Environment, Job Role And Salary

COVID-19 pandemic

In early 2020, the COVID-19 pandemic impaired the global economy, where the viral infection stopped almost all economic activities worldwide, resulting in business closures. There was a decreased buyer demand and reduced revenues, which resulted in record unemployment. The virus outbreak was particularly a challenge for working women and daily wage earners. The pandemic also severely affected professionals who had field roles that were not part of essential activities, like construction professionals, drivers and salespersons.

After a few months into the pandemic, authorities implemented various measures to control the outbreak. This allowed retailers and restaurant owners to conduct their business once again. They started hiring professionals to meet the renewed demand. Governments also offered small business owners tax cuts and salaried professionals loan moratoriums. All these efforts helped professionals to find jobs again or sustain the COVID-19-related inflation.

Related: COVID-19 And Your Job: Tips And Actions To Consider

Types Of Unemployment

Apart from cyclical unemployment, here are some other types of unemployment:

Frictional unemployment

Frictional unemployment is a type of unemployment that is temporary and voluntary. It occurs when professionals are finding new jobs. This is the most common type of unemployment and here are the professionals who are frictionally unemployed:

  • People who have started living in new cities and are looking for new jobs

  • Students who have completed school education or college graduates who are entering the workforce for the first time

  • Professionals who have left organisations to find even more rewarding roles and excel in their career

Institutional unemployment

Institutional unemployment is when professionals lose their jobs because of government and societal factors and incentives. The sources of this type of unemployment are usually permanent or long-term. Factors that contribute to institutional unemployment include high minimum wage policies, high unionisation rates, high social benefits, strict occupational licensing laws and discriminatory hiring.

Related: 10 Types Of Unemployment (With Reasons And Examples)

Seasonal unemployment

Seasonal unemployment results from less demand for certain jobs and skills during specific seasons. For instance, the ski business in the tourism sector only flourishes in winter. This type of unemployment affects only those professionals whose roles are most viable during a particular period of a year. Examples of this unemployment include construction professionals, farmers and resort staff.

Structural unemployment

Structural unemployment occurs when there is a change in the structure of an economy. This means that jobs are available, but people seeking employment do not possess the skills that align with the job requirements. It mostly occurs when there is a major technological advancement, like using motor cars instead of bullock carts.

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