Definition – Cyclical Unemployment is unemployment due to a period of negative economic growth, or economic slowdown. In a recession, cyclical unemployment will tend to rise sharply.
Peaks in unemployment correspond with swings in the economic cycle.
Recessions of 1981,1991/92 and 2008/09
Why unemployment rises in a recession
- If there are fewer orders for goods, firms produce less and therefore there is less demand for workers.
- Negative multiplier effects. If firms are producing less, then there will be less demand for related industries, such as transport – and demand for lorry drivers.
- Firms will try to cut costs to stay afloat during the period of negative growth, therefore, they will cut back on employing new staff – to try and reduce the wage bill.
- In an economic downturn, some firms will go out of business and workers will lose their jobs.
Similarly, when the economy recovers and starts to grow again, firms will begin to rehire workers and cyclical unemployment will fall.
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 occurred after the 1981 recession – unemployment took a while to reduce. However, it was less in evidence after the 2009/10 recession.
Cyclical Unemployment in US
Unemployment in US increased after the 1981/82 economic downturn and sharply following the recession of 2008.
The red line is the non-cyclical unemployment – unemployment due to structural factors.
The difference between the natural rate of unemployment and cyclical unemployment
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)
In the above graph of UK unemployment, unemployment rises in a recession, but even in periods of growth – e.g. late 1980s, unemployment still exists – suggesting that there is structural unemployment.