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What is Cyclical Unemployment?

Updated on October 4, 2012
The Business Cycle
The Business Cycle | Source

Defining Cyclical Unemployment

In order to provide a simple definition of cyclical unemployment, we only need to know the meaning of the word "cyclical", since we are already familiar with what it means to be unemployed. Because the word cyclical is defined as "recurring in cycles", cyclical unemployment simply means unemployment that occurs in a phase of the business cycle. Economics identify four phases of the business cycle which include the following:

  1. Trough
  2. Recession
  3. Peak
  4. Recovery

What Causes Cyclical Unemployment

This term cyclical unemployment, which is derived from the frequent shifts in the business cycle, occurs when there’s not enough demand for most goods and services. As a result, less production of those goods and services is needed. Since less production of goods and services is needed, the demand for workers who produce these goods and services will be less. In other words, consequently less workers will be needed when there is not enough work to be done in any business or organization.

Economists believes cyclical unemployment occurs as a result of businesses not having enough jobs available for all those who are actively searching for work. This scale-back in employer’s demand for workers results from a lack of spending and consumption in the overall economy.

What Phase of the Business Cycle Does this Occur
Cyclical unemployment occurs in the recession phase of the business cycle. It is caused by a deficiency of total spending. As the overall demand for goods and services decreases, employment falls and unemployment rises. For this reason, cyclical unemployment is sometimes refer to as deficient-demand unemployment. Based on findings, during the recession in the year 1982, for example, the unemployment rate rose to 9.7%. This compares with a 6.7% unemployment rate in the recession year 1991. Cyclical employment at the depth of the Great depression in 1933 was about 25% of the labor force.

When business cycles are at their peak in growth and production, cyclical unemployment rate will be low due to the maximization of total economic output. However, when there is a decline in economic output as measured by the gross domestic product (GDP), the business cycles are low and there will be a rise in the cyclical unemployment rate. Full-employment rate is achieved when cyclical unemployment is zero.

Other Types of Unemployment

Some authors may mention Classical, Structural, Frictional, and Marixian, as the other types of unemployment, while others, list Frictional and Structural unemployment as the only two other types of unemployment. However, with the exception of cyclical, all the other above types of unemployment may occur at the same time.

Copyright(C)I.mcFarlane 10/2012

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