Structural Unemployment vs. Cyclical Unemployment: An Overview
Unemployment is the result of workers losing their jobs, which can lead to an increase in cyclical unemployment due to an economic downturn, but if unemployment persists for many years, it can lead to structural unemployment.
The causes of structural unemployment can include shifts in the economy, improvements in technology, and workers lacking job skills that are required for them to find employment. Conversely, swings in companies’ business cycles and a period of negative economic growth—called a recession—can cause cyclical unemployment. In other words, cyclical unemployment is usually the result of insufficient demand for goods and services.
The unemployment rate is the total amount of unemployed people represented as a percentage of the workforce. While cyclical unemployment tends to be temporary in nature, the financial effects can be felt for many years. However, structural unemployment is more of a long-term event, which means more extensive measures need to be taken to reverse it.
In this article, we use structural and cyclical unemployment examples to explore how they come about and some of the solutions. Although both metrics measure unemployment, workers who are structurally or cyclically unemployed have distinct challenges facing them.
- Structural unemployment is a type of unemployment that can last for many years and can be caused by changes in technology or shifting demographics.
- Cyclical unemployment is caused by economic downturns or is related to changes in business conditions that affect the demand for workers.
- Cyclical unemployment is temporary, rising and falling along with contractionary and expansionary periods.
- Structural unemployment represents a long-term shift in how an economy functions, leading workers to become marginalized.
- Cyclical unemployment can become structural when those that are unemployed for a long time during a cyclical downturn need to develop new skills to become employable.
Unemployment is a measure (typically a percentage) of how many people in the workforce of an economy are without a job. Unemployment can occur for various reasons, such as an economic downturn or recession. Once the recession is over, the unemployment rate goes back down, eventually to full employment. However, sometimes changes to the structure of an economy can be so significant that it changes the ability of workers to find full-time work.
Following periods of significant economic downturns such as the Great Recession caused by the 2008 financial crisis, structural unemployment can rise. For example, investments in new technologies that can be used to construct homes can lead to the elimination of construction jobs in the housing market even after the recession has abated.
There are other types of employment measures that structural unemployment can impact. Frictional unemployment can occur when workers transition from one job to another. However, frictional unemployment is different from structural unemployment in that it is not due to economic changes but instead is voluntary. Total unemployment is a metric that includes structural unemployment and frictional unemployment representing the total number of people unemployed.
Causes of Structural Unemployment
Structural unemployment is a type of long-term unemployment that can last for many years. Structural unemployment can have multiple causes, such as workers not having the skills or training needed to qualify for the current job openings.
For example, major technological advances can occur in industries throughout an economy. Companies need to hire workers who have the technical skills, such as computer programming and mathematical skills, to propel their company forward. Individuals without those skills may become marginalized and experience structural unemployment because there is a mismatch between jobs in the market and their abilities.
The manufacturing sector in the United States has seen enormous technological advances over the past few decades. Production lines that once employed many workers now have computers and automated machines doing many of those jobs. Workers who are not skilled in computers and software, which are used to run a production line, are left behind. With advances in artificial intelligence (AI) in recent years, these technological changes are likely to accelerate.
Impacts of Structural Unemployment
The changes that drive structural unemployment can lead to tens of thousands of jobs being eliminated. Automation and shipping jobs to countries with low-cost labor are leading causes of structural unemployment in the U.S. As a result, unemployment would persist even when a recession has ended, and the country returns to stable economic growth.
Structural unemployment can lead to workers falling into poverty or earning less income as they take jobs that pay far less than their previous jobs. An increase in poverty has a detrimental impact on an economy since it leads to less consumer spending and fewer homes being purchased, leading to less tax revenue being collected by state and local governments due to fewer property taxes.
Solutions to Structural Unemployment
Structural unemployment needs long-term solutions that can reverse trends that have existed for many years. Solutions for structural unemployment might include a skills training program in which workers can get retrained for jobs that are in high demand. Training could include online or virtual as well as in-person training within the private sector. The federal government can lend a hand as well as in the case of the G.I. Bill. Following World War II, the GI Bill paid stipends for college expenses for veterans of the war so that they could re-acclimate into society by learning new skills to help them find high-paying jobs that were in demand. Low-interest rate mortgage loans were also made available through the GI Bill.
Cyclical unemployment is the result of a contraction in economic growth, which causes businesses to lay off workers and leads to an increase in the jobless rate.
Cyclical unemployment is a lack of employment as a result of changes to an economy’s business cycle. Cyclical employment is caused by job losses during downturns or contractions in an economy. A recession, which is when an economy has negative growth for two or more quarters in a row, is not required to cause this type of unemployment.
Understanding Cyclical Unemployment
Cyclical unemployment happens when the demand for goods and services in an economy decreases, forcing companies to lay off workers in an effort to cut costs. Companies generate revenue from the sale of goods and services, and when revenue decreases dramatically, businesses experience a drop in their profits. In an effort to keep the business afloat, companies lay off workers to reduce their labor costs. The aggregate number of workers that have been laid off as a percentage of the working population is the cyclical unemployment rate.
Cyclical unemployment can ebb and flow along with the business cycle, meaning that economic growth as measured by gross domestic product (GDP) can rise and fall all the time. When GDP growth declines, it typically leads to less demand for goods and services in an economy, which in turn increases cyclical unemployment. As a result, cyclical unemployment is usually inversely correlated to GDP growth, meaning it rises with lower GDP growth and decreases with higher GDP growth.
Cyclical unemployment is a temporary condition, albeit it can last for years if a recession is severe enough. Cyclical unemployment depends on the length and severity of an economic contraction. However, as an economy recovers from a recession, businesses experience an increase in demand for their goods and services, leading to more workers being hired and a decrease in cyclical unemployment.
We can see below, from the interactive unemployment map from the Bureau of Labor Statistics (BLS), that the total unemployment rate can vary from state to state. As of April 2022, the unemployment rate in California and Texas is slightly above 4%. Meanwhile, rural states in the northwest such as Montana and North Data have an unemployment rate just under 3%. Please bear in mind that the graph shows total unemployment, which includes both cyclical and structural unemployment.
How Cyclical Unemployment Is Calculated
The formula for calculating the cyclical unemployment rate is as follows:
Cyur=Cur−(Fur+Sur)where:Cyur=Cyclical unemployment rateCur=Current unemployment rateFur=Frictional unemployment rateSur=Structural unemployment rate
To calculate the cyclical unemployment rate, subtract the total of the frictional unemployment rate and the structural unemployment rate from the current unemployment rate.
- The current unemployment rate is the percentage of workers that are unemployed regardless of the reason or type of unemployment.
- Frictional unemployment is the number of workers that are voluntarily moving from one job to another. Frictional unemployment always exists at some level since there is always movement of labor in and out of the workforce and to different jobs.
- As stated earlier, structural unemployment is the long-term damage from changes in an economy that have caused unemployment.
By subtracting the frictional and structural rates from the current unemployment rate, we're left with only the rate of unemployed as a result of cyclical conditions, such as a change in the business cycle or a recession.
An economy operating at its full potential should have zero cyclical unemployment. The remaining unemployment rate should be equal to the total of structural and frictional unemployment.
Impacts of Cyclical Unemployment
During a recession, the demand for goods and services in an economy falls. As a result of companies earning less revenue, millions of workers can be laid off. For example, if an auto manufacturer typically sells one million cars per month, they would have adequate production workers employed to meet that demand. If a recession occurs and demand for cars decreases to 300,000 cars per month, the auto manufacturer would be forced to lay off workers since their monthly sales have dropped by 70%. The laid-off workers would represent an increase in the cyclical unemployment rate.
As the economy begins to recover and consumers and businesses begin spending again, the demand for cars increases. Auto manufacturers begin earning more revenue due to a jump in monthly car sales. As a result, auto manufacturers would add more workers to their production lines to meet the increase in demand for cars leading to a reduction in cyclical unemployment.
The recession that occurred as a result of the coronavirus pandemic led to millions of people being laid off from their jobs. As a result, unemployment rose dramatically to over 14% in the early days of the pandemic in April and May of 2020. As the economy began to recover, the unemployment rate decreased and was nearly 7% by the end of the year.
Although cyclical unemployment is a short-term event when compared to structural unemployment, laid-off workers can be out of work for up to a year or even two years. The damage to a person's financial situation can be severe.
For example, laid-off workers could have difficulty feeding their families and paying their bills, including their mortgage loan payments. If a borrower falls behind on their mortgage payments for an extended period of time, it could lead to the bank foreclosing on the property, which is when the bank seizes the home. Even when the economy recovers and individuals get back to work, the damage as a result of cyclical unemployment can be long-lasting. If a borrower has defaulted on their mortgage or other credit products while unemployed, it can be very difficult to obtain credit in the future, which can put them into financial hardship.
Solutions to Cyclical Unemployment
The federal government can expand fiscal stimulus through government spending and lowering taxes. Cutting taxes for consumers and businesses increases the amount of money in the economy, which increases consumer and business spending. Fiscal stimulus can also include a check or direct deposit sent directly to each taxpayer for them to spend in the economy. The increase in consumption boosts the demand for goods and services, increasing GDP. Higher demand boosts production resulting in businesses hiring more workers or stemming additional layoffs. As a result, cyclical unemployment decreases as fiscal stimulus injects much-needed cash into a struggling economy.
In addition to fiscal stimulus, monetary stimulus is another method used to reduce cyclical unemployment. In the United States, the Federal Reserve bank sets interest rate policy. During recessions, the FED typically cuts interest rates, which leads to lower rates for credit products such as loans. With lower interest rates, borrowing becomes more attractive and cheaper, leading to an increase in borrowing. The rise in borrowed funds injects more cash into the economy as consumers and businesses spend that money on various uses.
For example, lower mortgage rates tend to increase the demand for new homes. The increase in home buying, in turn, leads to a boost in construction spending to build new homes to satisfy the demand. As a result, construction workers are hired to satisfy the demand from consumers, which ultimately lowers cyclical unemployment. Both fiscal and monetary stimulus helps to lower cyclical unemployment through an increase in spending by consumers and businesses. The stimulus also helps prevent companies that might be on the brink of financial collapse from going under.
Cyclical unemployment represents those out of work due to a temporary contraction and can be rectified with stimulus measures. Structural unemployment represents long-term underlying issues within an economy that leaves workers unable to compete for jobs.
Cyclical unemployment is the number of people out of work as a result of a temporary setback in the economy, such as a recession or change in a business cycle. On the other hand, structural unemployment is more long-term in nature, and it's a result of many years of changes occurring that marginalize a group of workers. Structural unemployment can be caused by technological changes, a lack of skills, or jobs moving overseas to another country. Cyclical unemployment can be reduced through fiscal and monetary stimulus. However, structural unemployment needs more long-term solutions than merely increasing the amount of cash in an economy.
Cyclical unemployment can become structural unemployment when workers remain unemployed so long that when the economy begins to expand, and companies start hiring again, they need to acquire new skills to be competitive. Over time the skills needed to perform certain tasks can change, and when new positions become available, companies may not consider candidates without these new abilities.
Structural Unemployment vs. Cyclical Unemployment Examples
Below are examples of both cyclical and structural unemployment.
During the financial crisis of 2008 and the Great Recession that followed, the U.S. economy faced a rapid rise in cyclical unemployment. With millions of people unemployed, some couldn't pay their mortgage payments, which led to mortgage lenders filing for bankruptcy. Also, the demand for housing plummeted, which led to a decrease in new homes being built.
As a result, approximately two million workers in the construction Industry became unemployed, adding to cyclical unemployment. The FED responded by cutting interest rates and expanding monetary policy while the U.S. federal government enacted fiscal stimulus measures to jumpstart the economy.
As the economy eventually recovered, people began to go back to work, which boosted consumer spending and a renewed interest in buying homes again. This led to a return in demand for construction jobs, which ultimately pushed cyclical unemployment lower.
During the same period following the financial crisis and the resulting recession, some workers experienced structural unemployment. Although older workers were less likely to lose their jobs during the 2008 Great Recession, unemployed individuals in their 50s were one-fifth less likely to get rehired than individuals in their 20s or 30s. Between 2007 and 2010, the unemployment rate for individuals 62 and older increased by 4%, the largest surge during a four year period in the 35 years prior.
Older workers were more at risk of structural unemployment since they didn't have the skills to keep them competitive in the workforce and are often unwilling to relocate to another part of the country for a new job. As a result, older workers tend to remain unemployed for longer periods during economic downturns since their expertise doesn't match the jobs that are in demand. The result was an increase in structural unemployment for their age group.
What Is an Example of Cyclical Unemployment?
An example of cyclical unemployment is when construction workers were laid off during the Great Recession following the financial crisis of 2008. With the housing market struggling, construction of new homes fell dramatically, leading to a rise in cyclical unemployment for construction workers. Once the economy recovered, consumers began purchasing homes again, leading to a recovery in the housing market. As a result, new home construction increased, which led to more construction workers being rehired, causing cyclical unemployment to decrease.
What Causes Cyclical Unemployment?
Cyclical unemployment can be caused by a recession, which is a period of negative economic growth. Cyclical unemployment can also be caused by downturns in a business cycle in which demand for goods and services decreases over time.
How Is Cyclical Unemployment Calculated?
To calculate the cyclical unemployment rate, subtract the total of the frictional unemployment rate and the structural unemployment rate from the current unemployment rate.
Cyclical unemployment rate = Current unemployment rate – (Frictional unemployment rate + Structural unemployment rate)
What Is the Difference Between Cyclical and Structural Unemployment?
Cyclical unemployment is temporary and typically only lasts while a business cycle is struggling. Cyclical unemployment is the result of the natural ups and downs in a business cycle, such as expansions and contractions in economic growth.
On the other hand, structural unemployment represents long-term changes to the labor force in the structure of the economy over many years. Structural unemployment can be the result of a lack of skills for workers or technological advances that have put workers out of a job.
Is Cyclical Unemployment Long-Term?
No, cyclical unemployment is not usually a long-term phenomenon. However, if a recession is particularly severe, cyclical unemployment can last for a few years. Typically, Once fiscal and monetary stimulus have been injected into an economy, cyclical unemployment tends to decrease. The length of time it takes for cyclical unemployment to decline is related to the extent of the stimulus measures and how severe the economic downturn was at the onset.
The Bottom Line
Structural unemployment is when workers experience unemployment for a long period of time as a result of structural changes in an economy and its labor force. Structural unemployment can be caused by massive changes within an industry, such as the manufacturing industry moving jobs overseas. On the other hand, cyclical unemployment is the result of a recession or economic downturn and is typically more temporary in nature. Policymakers can take steps to decrease cyclical unemployment once an economic downturn has occurred.
However, both cyclical and structural unemployment can impact workers for years to come. If a recession is particularly severe, even workers who lost their job due to cyclical events may face extreme financial hardship such as a loss of home and a permanent change in their financial status.