Cyclical Unemployment: Causes, Examples & More

January 20, 2023 Stan

Unemployment has many types, causes, and specific features. While the pandemic and its aftermath created considerable economic shifts, unemployment has always ebbed and flowed for several reasons.

With the word “recession” in the air, you may wonder where cyclical unemployment falls on the spectrum and what it entails.

Read on for more about:

Definition and cyclical unemployment examples
Causes of cyclical unemployment
Ways to prevent cyclical unemployment

What is cyclical unemployment?

Cyclical unemployment is the percentage of people without work during an economic cycle. Economic activity typically follows the fluctuations of the gross domestic product (GDP). When the GDP experiences a significant fall, layoffs and sometimes even a recession can follow.

As economists study and predict trends toward cyclical unemployment, the government may employ its policymakers to create new fiscal policy and monetary policies to promote a more robust labor force and overall economic upswing.

The stages of cyclical unemployment

Because cyclical unemployment fluctuates and follows a pattern, it looks relatively similar each time it occurs. Read below for the stages of cyclical unemployment.

1. A recession begins

Recessions can be caused by many things — some from a burst in the economy, like the housing market crash of the Great Recession, and others are a slower burn of the business cycle.

Either way, consumer demand is down, which makes jobs more scarce because there is a higher amount of people in the workforce than there is demand for goods and services.

2. Layoffs occur

When demand is down, there becomes less profit and an excess of workers. This results in companies having to lay off employees. This can result in more people collecting unemployment benefits, which puts an even more significant strain on the economy.

3. The recession progresses

As the economic downturn continues, cyclical unemployment rates continue to experience fluctuations. Throughout this time, economists analyze macroeconomics and microeconomics and their aggregate demand variables to predict trends and help the government create policies that may fuel the economy.

Macroeconomics examines big-picture factors like:

National markets
Employment
Gross domestic product
Inflation

Microeconomics examines little-picture factors like:

Individual markets
Supply and demand
Goods and services

4. An economic upturn begins

The upside to a recession is that the economy operates on a cycle, just like cyclical unemployment. This means that the economic contraction might eventually end, the economy can enter an upturn, and the quest for full employment may continue.

During this period, the business cycle begins to self-correct, consumer demand can increase, or the Federal Reserve may provide incentives to boost the economy.

5. Employees return to work

In the final stage of the cycle, people begin to return to the workforce. Ideally, this can mark the beginning of lowered unemployment rates. However, other types of long-term unemployment can happen due to a changing economy and its after-effects.

Cyclical unemployment vs. other types of unemployment

While cyclical unemployment is a temporary state based on the economy, other types of unemployment have different causes and characteristics. Look at a few other types of unemployment below that can happen in addition to cyclical unemployment.

Structural unemployment

Structural unemployment occurs when the economy changes and the job market mismatches workers’ skills. This is generally caused by government policy changes or technological advances that replace human skills.

Frictional unemployment

Frictional unemployment happens when an employee leaves a position by choice and looks for their next venture.

This can also refer to the gap recent graduates may experience before finding their first job. Because workers are financially stable enough to support themselves during this time of purposeful unemployment, it often indicates a healthy economy.

Natural unemployment

Natural unemployment is an indicator that inflation is on its way. Rises in the natural unemployment rate often result from a combination of structural and frictional unemployment, which may increase the cost of goods and services.

10 examples of cyclical unemployment throughout history

Cyclical unemployment is directly correlated with the cycles of an economic recession. Tracking the recessions throughout history can indicate the cyclical unemployment of the U.S. economy. See below for examples of each recession and the corresponding unemployment cycles since World War II.

1. End of World War II: February 1945 to October 1945

The war resulted in substantial economic growth for the United States, with a high demand for jobs to support the needs of the military. However, when the war ended and government spending dried up, the labor market collapsed, and the economy followed.

Fortunately, this recession lasted less than a year as the manufacturing industry was able to adapt and create non-war related new jobs, especially for construction workers.

2. Post-war consumer spending slows: November 1948 to October 1949

During the war, there were government-mandated rations and restrictions. But when those were lifted, American citizens went wild with spending. However, after the spending craze slowed and soldiers struggled to find their new place in the workforce, the economy struggled to balance.

4. Asian flu pandemic: August 1957 to April 1958

In 1957, a pandemic in Hong Kong spread to India, Europe, and the United States. It killed over one million people and crushed U.S. exports by more than $4 billion, triggering another recession. During this time, unemployment surged to 6.2 percent.

5. Foreign automobiles and recession: April 1960 to February 1961

In the late 1950s, Americans adopted a growing interest in foreign cars, which was incredibly detrimental to the U.S. auto industry. This new fascination, combined with rising interest rates designated by the Federal Reserve, caused a recession.

6. The oil embargo: November 1973 to March 1975

In 1973 the Organization of Petroleum Exporting Countries imposed an oil embargo that caused gas prices to soar. This kicked off a spending cut by Americans to save money. This, combined with inflation, wage freezes, and layoffs, caused a stagnant economy and unemployment to rise to 8.8 percent.

7. The double dip recession: July 1981 to November 1982

There was a very short-term recession due to an energy crisis just before 1980, but this was much more detrimental. This recession was caused by the inconsistent and low levels of oil exports, which caused prices to surge.

During this time, interest rates were not raised enough to slow down the rate of inflation until the Federal Reserve hiked rates to 21.5 percent. The spike created a ripple effect and drove statistics to a labor force with over 10 percent unemployed workers.

8. 9/11 and the dot com crash: March 2001 to November 2001

In the late 1990s, the Internet burst onto the scene, and many investors put everything into their new dot com ventures. Because of this, unestablished businesses were inflated to unsustainable levels, and the bubble burst in 2001.

The dot com crash, combined with 9/11 and several corporate scandals, caused the first recession of the new millennium.

9. The Great Recession: December 2007 to June 2009

The Great Recession is the biggest financial collapse since the Great Depression. The heavy investments caused financial institutions to put into the mortgage market, specifically mortgage-backed securities.

However, homeowners lost their homes, and investment banks collapsed when people defaulted on their loans. During this time, the stock market crashed, people lost their retirement funds, and 10 percent of Americans were unemployed people. The government had to pump $1.5 trillion worth of stimulus money into the economy to correct this mess.

10. The COVID-19 recession: February 2020 to April 2020

When the COVID-19 pandemic hit, the world faced a financial crisis. With lockdowns, job losses, and a massive decline in consumer activity, the economy lost 20.5 million jobs, and unemployment surged to 14.7 percent.

The government quickly stepped in with stimulus money, approving $6 trillion in relief.

What cyclical unemployment means for you

Cyclical unemployment is the percentage of people without work during an economic cycle that generally predicts a recession. Throughout history, there have been multiple recessions that have caused unemployment rates to fluctuate.

When cyclical unemployment happens, the government often uses a stimulus package to help boost the economy back into a more positive cycle.

Now that you’ve seen causes and trends throughout history, you might be able to identify signs of cyclical unemployment in the present-day economy.

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