Cyclical Unemployment

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Here’s a straightforward cyclical unemployment definition: a form of unemployment that occurs as a result of economic slowdown or negative economic growth. Cyclical unemployment is closely associated with the ups and downs in levels of production and growth within the business cycle.

Cyclical Unemployment Definition

Cyclical unemployment typically begins to arise when levels of personal consumption go down—lower demand overall for goods and services. Once this happens, businesses earn lower revenues and typically choose to keep earning profits by laying off more workers. Economic policy is majorly concerned with cyclical unemployment; economists in general work to equip governments with policy tools that will help stimulate the economy and avoid serious economic hardship like that of the Great Depression.

Compared to Other Forms of Unemployment

Economists describe several forms of unemployment. Cyclical unemployment is just one type. Other forms of unemployment include institutional, structural, and frictional unemployment. They have different causes and manifest differently. Structural unemployment, for instance, is not affected by the ups and downs of the business cycle; rather, it is a product of underlying (structural) changes in the economy (e.g. when societies transitioned from telegrams to phones, jobs in the telegram industry declined, producing structural unemployment).

Although they are all different, these various types of unemployment can occur simultaneously. It is important to note, though, that cyclical unemployment doesn’t happen at the highest point of business cycles, although the other kinds of unemployment can.

Cyclical Unemployment is not Seasonal Unemployment

They might sound synonymous, but cyclical and seasonal unemployment are two distinct phenomena. Cyclical unemployment is linked to the workings of the business cycle, while seasonal unemployment is linked to changes in demand associated with changes in the season (e.g. summer versus winter). Workers who experience seasonal employment are those whose employment only takes place during certain seasons. For example, retail workers may be hired for the holiday season, and then become unemployed once demand decreases in January after the holidays.

Cyclical Unemployment and Recessions

Because companies often hesitate to lay off workers (it is a loss of their investment in existing workers), cyclical unemployment doesn’t usually arise until the economy is doing quite poorly. That’s the point at which firms often feel that they are forced to let go of workers. Thus, cyclical unemployment is closely associated with recessions and will increase precipitously during such economic periods.

Here are some of the main reasons why this is this association exists:

  • When companies go out of business entirely due to an economic recession, the workers who were employed there become unemployed.
  • With fewer goods being ordered, production decreases to match this level of demand. The result is that there is less demand for labor, and more workers become unemployed.
  • This also creates negative multiplier effects: with lower levels of production in one industry, the industries that are linked to that industry are also affected and experience decreased demand. One example of this might be the cleaning services that would normally clean an office that has now closed due to lowered production levels—they lose out on business and so may also have less need for labor. Their employees will also then becoming unemployed.
  • When negative growth arises, companies attempt to lower their wage-related costs by hiring fewer new employees than they would in a more vibrant economic period.

As you might expect, the association between cyclical unemployment and recessions also exists in reverse. When the economy reaches a healthier state of growth, companies will hire more workers, thereby reducing cyclical unemployment.

Cyclical Unemployment Examples

Historically, economic downturns have often been triggered by stock market crashes. Two of the most notable examples are the stock market crash that took place in 1929—which led to the infamous Great Depression—and the 2008 financial crash that preceded the Great Recession. Crashes lead to recessions by contributing to widespread economic anxiety and fear as well as a lack of trust that the economy will function stably.

A more industry-specific example might be workers who construct homes. When the economy is undergoing negative growth, consumers have less money to spend. Thus demand falls for new homes, so companies that would normally hire laborers to build homes now refrain from doing so, because it will not be profitable. Many workers who would previously have been employed in building homes (during periods of high economic growth and high demand for new homes) will now be unemployed.

Prateek Agarwal
Prateek Agarwal
Member since June 20, 2011
Prateek Agarwal’s passion for economics began during his undergrad career at USC, where he studied economics and business. He started Intelligent Economist in 2011 as a way of teaching current and fellow students about the intricacies of the subject. Since then he has researched the field extensively and has published over 200 articles. If you have any questions, comments or suggestions, please email me or connect with me on LinkedIn - https://www.linkedin.com/in/prateekgrwl/

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