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What is Cyclical Unemployment?

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Cyclical unemployment is closely related to Keynesian economics theory. It refers to a situation where there are more people looking for work than there are jobs available. This type of unemployment is caused by the business cycle. It can occur for a number of reasons but is related to the performance of the economy. A good example is when cyclical unemployment occurs due to a fall in consumer demand. This leads to manufacturers reducing production and thus not needing as many employees. This situation causes increased unemployment.

A Closer Look at Cyclical Unemployment and the Business Cycle

The reason why we refer to this as cyclical unemployment is that it is directly linked to the business cycle. When business is good there is less unemployment but when things get tough for businesses then unemployment goes on the rise. The term, ‘business cycle’ can be a bit misleading because it suggests that it is predictable. In fact this cycle can be very unpredictable and this is why sudden mass unemployment can come as a shock. For instance the downturn after the economic crash a few years ago caught most people by surprise.

Although the business cycle is not exactly predictable it is said to have four stages. At the beginning of the business cycle there is a slowdown in the economy and this leads to a situation referred to as contraction. Eventually the slowdown causes the economy to reach its lowest point and this is the second stage of the business cycle. At this second stage unemployment will be at its lowest. Next the economy will begin to expand again and employment opportunities will increase. The fourth stage is the peak and here unemployment is at its lowest. When this peak is reached it can occur that there are more jobs available then there are people to fill them. Unfortunately the only place to go after a peak is down.

Another way to look at cyclical unemployment is to view it as a negative correlation between the employment rate and GDP. As consumer demand falls it leads to a situation where unemployment increases. The fall in employment levels will lead to even less consumer demand. This can lead to a downward spiral that causes a lot of problems within the economy.

Cyclical Unemployment and Depressions

The business cycle is said to usually revolve quite quickly. This should mean then that periods of a lot of unemployment shouldn’t last very long. Unfortunately this isn’t always the case and sometimes we hit a long period of mass unemployment referred to as a depression. This type of situation is caused by a number of different factors and it can keep the economy in trouble for many years. During this time unemployment becomes a huge problem and it is often necessary for governments to step in. The usual way to do this is by investing in big projects or other Keynesian type solutions. The government might also use incentives such as lower taxes to stimulate the economy.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


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