What is Cyclical Unemployment?
848 reads · Last updated: December 5, 2024
Cyclical unemployment is the component of overall unemployment that results directly from cycles of economic upturn and downturn. Unemployment typically rises during recessions and declines during economic expansions. Moderating cyclical unemployment during recessions is a major motivation behind the study of economics and the goal of the various policy tools that governments employ to stimulate the economy.
Definition
Cyclical unemployment refers to the unemployment that results from economic downturns and upturns. During a recession, demand decreases, companies reduce production, leading to higher unemployment rates; conversely, during an economic expansion, demand increases, companies expand production, and unemployment rates decrease.
Origin
The concept of cyclical unemployment originated from the study of economic cycles, particularly when economists began systematically studying economic fluctuations in the early 20th century. Keynesian economics further developed this concept during the Great Depression of the 1930s, emphasizing government intervention to alleviate unemployment during economic downturns.
Categories and Features
Cyclical unemployment is primarily associated with the four phases of the economic cycle: expansion, peak, recession, and trough. During the expansion phase, unemployment is typically low due to increased economic activity; during the recession phase, unemployment rises due to decreased economic activity. It is characterized by its close relation to the overall level of economic activity and is usually short-term, though it can persist longer during severe recessions.
Case Studies
A typical case is the 2008 global financial crisis, during which the U.S. unemployment rate rose from 4.6% in 2007 to 9.5% in 2009. The unemployment during this period was primarily due to the recession-induced drop in demand. Another example is the early stages of the COVID-19 pandemic in 2020, when unemployment rates surged in many countries worldwide due to the sudden halt in economic activities.
Common Issues
Investors often confuse cyclical unemployment with structural unemployment, the latter being long-term unemployment caused by changes in the economic structure. Cyclical unemployment is typically temporary and improves with economic recovery. Investors should monitor economic indicators such as GDP growth rates and unemployment rates to assess the phase of the economic cycle.
