What is Cyclical Unemployment?

Cyclical Unemployment Definition

Cyclical Unemployment is the loss of job associated with business cycles faced by an economy. Business cycles refer to recession (a downturn) or boom (upturn) faces by an economy.

When an economy is in recession, unemployment rates will be high. This is because during a recession, the demand for goods is low. Since demand is low, production levels need to be brought down in order to save costs. As a result, workers are laid off by businesses to be able to stay afloat. This in turn has a compounding or domino effect on spending. Workers that face layoffs have lesser amount of money to spend which further leads to a reduction in demand. On the other hand, employment levels go up when an economy is facing a boom as demand is higher in this period.

Thus, typically, cyclical unemployment is temporary and lasts for as long as the economy is under recession and begins to reduce when the economy starts to recover.


Cyclical Unemployment Business Cycles Crest and Trough


Examples of Cyclical Unemployment

The most recent example of cyclical unemployment was at the outset of COVID-19 across the world in 2020. Since worldwide lockdowns were announced, many businesses found it hard to stay afloat. Consumer spending plummeted and thus production associated with such products also came down. As a result, businesses had to lay off their staff. In India, construction was one such sector that faced a sudden hit and many construction workers were laid off. Overall unemployment levels in India in May 2020 reached a peak level of 23.5%.

However, over time, as economies began to bounce back, employment levels rose back again. So much so that, the demand for labour became much higher than the supply in some sectors like IT and Technology driven sectors.


Cyclical Unemployment


Computing Cyclical Unemployment

Since cyclical unemployment is associated with business cycles, comparing unemployment levels at the trough of the business cycle and unemployment levels when the economy is stable (natural unemployment rate), would give an estimate of cyclical unemployment.

Another way of computing Cyclical Unemployment is to subtract from total unemployment other forms of unemployment. These include structural, frictional and seasonal unemployment levels.

Cyclical Unemployment = Total Unemployment – (Structural Unemployment + Frictional Unemployment + Seasonal Unemployment)


How to Control Cyclical Unemployment?

Since cyclical unemployment is a result of recession and reduced spending, the government might try to control it by using expansionary monetary policies and infusing more money into the economy by lowering lending rates. The government might also extend unemployment benefits or make direct cash transfers to help those who have lost their jobs.


What are the Other Forms of Unemployment?

Other forms of unemployment are mentioned below briefing:

  • Structural Unemployment: Caused by a change in the basic structure of the economy. For instance, when computers came into use, typists working on typewriters lost their jobs. Similarly, in the future as Autopilot cars become vastly used, drivers might lose their jobs.
  • Frictional Unemployment: This occurs when workers are in-between jobs. That is, they are moving from one job to another and in that process looking out for new jobs.
  • Seasonal Unemployment: This type of unemployment occurs when a job role is associated with a particular time of a year. Since these workers work in seasonal jobs, their demand reduces in off-season time. Agricultural workers, for instance, will find more employment opportunities during the harvest seasons. Similarly, tourist guides would have more work during their peak tourism season.