The cyclical unemployment is a factor in overall unemployment that is related to the regular ups and downs or existing in the growth and production, which occur within the cyclical trends economic cycle.
When economic cycles are at their peak, cyclical unemployment tends to be low, because total economic production is being maximized. When economic production falls, as measured by gross domestic product (GDP), the economic cycle is low and cyclical unemployment increases.
As in all unemployment, when the consumer demand for a product or service decreases, to compensate for this situation, a corresponding reduction in the production of supplies can occur.
As supply levels are reduced, fewer employees will be needed in order to meet the lower production standard volume.
Workers who are no longer needed will be released by the company, resulting in unemployment for these workers.
Cyclical unemployment occurs when workers lose their jobs due to declines in the economic cycle. If the economy contracts by two quarters or more, it will be in a recession.
Economists describe cyclical unemployment as the consequence that companies do not have sufficient demand for labor to employ all those looking for work at that point in the economic cycle.
Most economic cycles are repetitive in nature, as a slowdown will eventually shift to an economic recovery, followed by another slowdown.
It is common for cyclical unemployment to be the main cause of high unemployment. Unemployment is considered high if it exceeds 8% of the workforce. It is known as cyclical because it is linked to the business cycle.
When the economy returns to the expansion phase of the economic cycle, the unemployed will be hired again. Cyclical unemployment is temporary, it depends on the duration of the economic contraction. A typical recession lasts about 18 months and a depression can last for 10 years.
To get out of a cyclical crisis, the State must often initiate a recovery policy. If the recovery is achieved through an investment policy to boost consumption, we speak of Keynesian recovery (stimulus by demand).
Types of unemployment
Cyclical unemployment is one of the three main types of unemployment recognized by economists. The other types are structural and frictional.
In most cases, there are several types of unemployment at the same time. With the exception of cyclical unemployment, other types can occur even in the maximum ranges of economic cycles, when the economy is said to be close or in full employment.
Cyclical unemployment becomes structural when workers remain unemployed long enough to acquire new skills and thus be competitive when the economy begins to expand and companies start hiring again.
Causes Cyclical Unemployment
Changes in companies’ business cycles cause cyclical unemployment. This is related to the economic cycle of an economy.
It occurs when there are job losses during recessions and contractions in the economic cycle. To cause this type of unemployment, a real recession is not necessary, that is, when an economy has had negative growth for two or more consecutive quarters.
1.Lack Of Demand
The lack of demand for products is one of the main factors that cause cyclical unemployment. It usually starts with a decrease in personal consumption. When there is a drop in consumer demand, business revenues generally decline.
Consequently, companies need to lay off workers to cut costs and thus maintain their profit margins. There is often not enough production for workers to keep themselves busy.
What a company least wants to do is lay off its workers. It is a traumatic event. A company can lose excellent employees in which it invests a lot of time and effort.
That is why, by the time cyclical unemployment begins, the economy is already in recession. Companies wait until they are sure that the slowdown is serious before starting layoffs.
What can initiate an economic slowdown, which translates into cyclical unemployment?
It is usually a slowdown in the stock market. Examples in the US include the 1929 collapse, the 2000 technological collapse and the 2008 financial collapse.
A serious accident can cause a recession, creating panic and a loss of confidence in the economy. Companies suffer a loss of equity when stock prices fall.
- 2008 Financial Crisis
During the 2008 financial crisis, the housing bubble burst in the United States, starting a major recession and facing cyclical unemployment.
As more and more borrowers failed to meet the debt obligations associated with their homes and high-risk creditors declared bankruptcy, qualifications for new loans became more rigid, reducing demand for new construction.
As a result, approximately two million people employed as construction workers lost their jobs and suffered cyclical unemployment.
By increasing the total number of unemployed and with an increasing number of borrowers unable to pay for their homes, more properties were subject to exclusion, making the demand for new construction even lower.
As the economy recovered in the following years, the financial sector became profitable again and began to grant more and more loans.
People started buying houses again, which caused property prices to rise again.
- Covid19 Pandemic
The Covid19 crisis has already turned into an economic and labor market shock, affecting not only supply (production of goods and services) but also demand (consumption and investment).
The prospects for the economy and the quantity and quality of jobs are declining rapidly.
In the UK, recent estimates have shown a record increase in the number of redundancies to 227,000. This is the highest level since 2009, the last time there has been a significant economic downturn.
- The Great Depression
Cyclical unemployment can become a downward spiral that feeds on itself. This is because new unemployed people now have less disposable income. This further reduces demand and commercial revenue, leading to further layoffs.
Without intervention, this spiral will continue until supply is reduced to stabilize with limited demand. This may not happen until unemployment reaches 25%.
It happened during the Great Depression, which lasted a decade. In fact, what really ended the depression was the high demand for military equipment when the United States entered World War II.
Cyclic to structural unemployment
One can become unemployed cyclically and then fall victim to structural unemployment. During a recession, many factories switch to sophisticated computer equipment to operate the machines.
Now, workers need to get up-to-date computer skills to manage the robots that operate the machines that used to work with them.
Less workers are also needed. Those who do not return to school will be structurally unemployed.