Readers Question: What is the difference between natural rate of unemployment and cyclical employment?
The natural rate of unemployment measures the unemployment when the labour market is in equilibrium. It is composed of supply side unemployment such as frictional and structural unemployment.
For example, even when the economy is at full capacity / full employment, people may be unemployed because they lack the necessary skills to get a job. Also, even at full employment, there will always be some people in between jobs (frictional unemployment)
Cyclical Unemployment is unemployment due to negative economic growth, or output being below full capacity. In a recession, cyclical unemployment will rise sharply. This is because if there are less orders for goods, firms produce less and therefore there is less demand for workers.
(A recent study suggested UK unemployment would peak at 3.2 million in 2010 due to the scale of the current recession.)
Often cyclical unemployment can cause a rise in the natural rate of unemployment. If young people are out of work for a long time in a recession, it can be difficult to get back into employment because of lack of job experience and decline in motivation. This is known as the hysteresis theory. It occured after the 1981 recession – unemployment took a while to reduce.
Cyclical Unemployment in US
Unemployment in US increased after 1982 economic downturn and sharply following recession of 2008.
Cyclical Unemployment during 2010 recession.