Cyclical Unemployment
What is Cyclical Unemployment?
Cyclical unemployment is unemployment that occurs due to a decline in economic activity during a recession.
Cyclical unemployment is directly related to the business cycle. During an economic downturn or recession, the demand for goods and services decreases, leading to layoffs and higher unemployment. When the economy recovers and enters an expansion phase, cyclical unemployment tends to decrease as businesses hire more workers to meet the increased demand.
Cyclical Unemployment: a worked example
An economy has a labor force of 80 million and 4.8 million people unemployed, so the unemployment rate is 4.8 / 80 = 6.0%. If the natural rate of unemployment is 4.5%, cyclical unemployment is 6.0% minus 4.5% = 1.5 percentage points, which is 0.015 times 80 million, or 1.2 million workers. Those 1.2 million lost their jobs to falling demand rather than to obsolete skills, so a recovery in spending can re-employ them without any retraining and push the rate back to 4.5%.
The mistake students make with cyclical unemployment
Students fold cyclical unemployment into the natural rate of unemployment. The natural rate is frictional plus structural unemployment only; cyclical unemployment is the amount by which the actual unemployment rate exceeds the natural rate, which is why cyclical unemployment is zero at full employment and can even be negative when output runs above potential.
Cyclical Unemployment questions
How do you calculate cyclical unemployment?
Cyclical unemployment equals the actual unemployment rate minus the natural rate of unemployment, so an economy with a 7% actual rate and a 5% natural rate has 2 percentage points of cyclical unemployment. The figure is zero at full employment and turns negative when the economy is producing beyond its potential output.
What is the difference between cyclical and structural unemployment?
Cyclical unemployment is caused by a fall in total spending during a recession and disappears when demand recovers, while structural unemployment is caused by a mismatch between workers' skills and available jobs and persists even in a strong economy. Only cyclical unemployment responds to expansionary fiscal and monetary policy.
Is cyclical unemployment included in the natural rate of unemployment?
Cyclical unemployment is not included in the natural rate of unemployment, which is made up of frictional and structural unemployment only. Cyclical unemployment is instead the gap between the actual unemployment rate and the natural rate, so it equals zero when the economy is at full employment.
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