DR Ambedkar IAS Academy

Cyclical Unemployment

What Is Cyclical Unemployment?

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.

Cyclical unemployment is the impact of economic recession or expansion on the total unemployment rate.

Cyclical unemployment generally rises during recessions and falls during economic expansions and is a major focus of economic policy.

Cyclical unemployment is one factor among many that contribute to total unemployment, including seasonal, structural, frictional, and institutional factors.

Cyclical unemployment relates to the irregular ups and downs, or cyclical trends in growth and production, as measured by the gross domestic product (GDP), that occur within the business cycle. Most business cycles eventually reverse, with the downturn shifting to an upturn, followed by another downturn.

Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work at that point within the business cycle. When demand for a product and service declines, there can be a corresponding reduction in supply production to compensate. As the supply levels are reduced, fewer employees are required to meet the lower standard of production volume. Those workers who are no longer needed will be released by the company, resulting in their unemployment

When economic output falls, the business cycle is low and cyclical unemployment will rise. Conversely, when business cycles are at their peak, cyclical unemployment will tend to be low, because there is high demand for labor.

Example of Cyclical Unemployment

During the financial crisis in 2008, the housing bubble burst and the Great Recession began. As more and more borrowers failed to meet the debt obligations associated with their homes, and qualifications for new loans become more stringent, the demand for new construction declined. With the overall number of unemployed climbing, and more borrowers unable to maintain payments on their homes, additional properties were subject to foreclosure, driving demand for construction even lower. As a result, approximately two million workers in the construction field became unemployed. This rise in unemployment was cyclical unemployment.

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