What is Cyclical Unemployment

Cyclical unemployment is a factor of overall unemployment that relates to the regular ups and downs, or cyclical trends in growth and production, that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will tend to be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise.

As with all unemployment, when consumer demand for a product or 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 the aforementioned workers becoming unemployed.

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Cyclical Unemployment

BREAKING DOWN Cyclical Unemployment

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. Most business cycles are repetitive in nature, with the downturn eventually shifting to an upturn again, followed by another downturn.

Example Cause 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 2 million workers in the construction field became unemployed.

As the economy recovered over the following years, the financial sector returned to profitability and began to make more loans. People began buying homes again and remodeling, causing the prices of real estate to climb once again. Construction jobs returned to meet this renewed demand in the housing sector.

Classes of Unemployment

Cyclical unemployment is one of three main classes of unemployment as recognized by economists. Other types include structural and frictional. Rather than being caused by the ebbs and flows of the business cycle, structural unemployment results from fundamental shifts in the makeup of the economy - for example, jobs lost in the buggy-whip sector once automobiles came to dominate. It is a mismatch between the supply and demand for certain skills in the labor market. Frictional unemployment is short-term joblessness caused by the actual process of leaving one job to start another, including the time needed to look for a new job. Additional categories exist outside the main three and can include natural, long-term, real, seasonal and classical unemployment. There is also a category for those considered underemployed.

In most cases, several types of unemployment exist at the same time. With the exception of cyclical unemployment, the other classes can occur even at the peak ranges of business cycles, when the economy is said to be at or near full employment.

Cyclical Versus Seasonal

While cyclical unemployment is attributed to the business cycle of an economy, seasonal unemployment occurs as demands shift from one season to the next. This category can include any workers whose jobs are dependent on a particular season. For example, schoolteachers may be considered seasonal, based on the fact that most schools in the U.S. cease or limit operations during the summer, as well as construction workers living in areas where construction during the winter months is challenging. Certain retail stores hire seasonal workers during the winter holiday season to better manage increased sales, but release those workers during the post-holiday demand shift. Often, official unemployment statistics will be adjusted, or smoothed, to account for seasonal unemployment (called seasonally adjusted unemployment).