What Is Cyclical Unemployment? 5 Types of Unemployment

Cyclical unemployment refers to how the unemployment rate goes up and down in relation to the wider business cycle.

A contraction of the gross domestic product (GDP) indicates the beginning of a recession and layoffs almost always follow. This might affect certain demographics of workers more or less depending on the specific nature of the recession, but the general job market tends to suffer in total.

Through a combination of fiscal policy and monetary policy, governments and central banks work to turn the tide of these economic downturns as fast as possible. While full employment might remain elusive, labor force participation still invariably ticks up whenever a recession ends and an economic upswing begins.

Cyclical unemployment is unavoidable—no matter how healthy the economy is, it will eventually enter a downturn of some variety. These five steps crystallize what exactly happens to bring about this state of affairs:

• Beginning of a recession: An economic contraction—or recession—can start for many reasons. For example, a specific bubble in the economy might burst (as the housing market did in the Great Recession between 2007 and 2009) or the business cycle might slow down in a less dramatic, more general fashion. The collapse in consumer demand translates directly to a need for fewer workers than were necessary in economic boom times. Once recessionary forces take hold, the cyclical unemployment rate begins to tick upward. This is due to the mismatch between a lower demand for goods and services and a higher supply of workers than necessary.
• Employee layoffs: Economic conditions force people to leave the labor force in the form of layoffs, leading people to collect unemployment benefits to make up for at least some of the lost income. As an example of cyclical unemployment, think of how the housing market collapse led to less new development and fewer construction workers. As more people lose jobs, fewer people can afford goods and services. This leads to an even greater collapse of demand and an increase in job losses.
• Recession effects continue: Macroeconomic and microeconomic conditions both determine how long a recession’s effects will last before recovery begins. During this period, the cyclical unemployment rate might go higher, lower, or oscillate due to economic uncertainty. After the stock market crash of 1929, the Great Depression lasted until the United States’ entrance into World War II—and the unemployment rate fluctuated significantly throughout that decade. Governments and central banks learned valuable lessons during that period to prevent any recession from lasting as long ever again.
• Start of an economic upturn: Every economic downturn eventually comes to an end, leading to the next boom for the wider economy. The US Federal Reserve might provide incentives like lowered interest rates and an increased money supply to facilitate a quicker recovery. Even without this sort of intervention, the business cycle will eventually self-correct and lead to an increase in consumer demand.
• Workers go back to jobs: As aggregate demand begins to build up, unemployed people begin to return to work. Ideally, even throughout an economic downturn, people can avoid long-term unemployment by learning new skills and finding new jobs; however, this might prove very difficult, depending on the depth and scope of a recession. Eventually, the cycle completes and job opportunities become plentiful again.

There are multiple types of unemployment to compare:

1. 1. Cyclical unemployment: This type of collective unemployment fluctuates according to the greater business cycle in a country. As society descends into a recession and then eventually experiences an economic upturn, the unemployment rate will see a corresponding increase followed by a gradual decline.
2. 2. Frictional unemployment: In a solid labor market, frictional unemployment can be a sign of healthy economic activity rather than financial crisis. This type of joblessness refers to when people quit their jobs prior to starting new ones. These sorts of fluctuations in the labor market prove opportunities are plentiful rather than scarce.
3. 3. Institutional unemployment: Sometimes a person can become jobless despite the economy doing fine in a more general sense. Institutional unemployment refers to when a person loses their job for a circumstantial reason rather than a more broadly economic one. For instance, suppose a state raises its minimum wage and business owners proceed to lay off workers rather than offer them higher wages. This is an example of institutional unemployment at work.
4. 4. Seasonal unemployment: Some jobs are naturally short-term in duration. Suppose you work at a Christmas tree lot. Naturally, at the end of the Christmas season, demand for these trees will collapse and you’ll need to seek new employment. This has little to do with broader economic conditions and more to do with the seasonal nature of the job.
5. 5. Structural unemployment: Economic growth leads to innovation—and, occasionally, innovation leads to entire industries becoming unnecessary. Structural unemployment refers to these transitions in which one type of labor market supplants another. Consider the transition from gas-powered lamps to electrically powered alternatives around the turn of the twentieth century. This led to a large number of unemployed workers in the gaslamp sector and increased employment for electrical workers regardless of wider economic conditions.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by the world’s best, including Paul Krugman, Doris Kearns Goodwin, Ron Finley, Jane Goodall, and more.