Cyclical Unemployment Definition:
Cyclical unemployment is usually the cause of high unemployment, when rates quickly grow to 8% or even 10% of the labor force. It's known as cyclical because, when the economy re-enters the expansion phase of the business cycle, the unemployed will get rehired. Cyclical unemployment is temporary -- although it could last anywhere from 18 months (the typical time frame of a recession) to ten years (during a depression).
Causes of Cyclical Unemployment:
The last thing a business wants to do is layoff workers. It's a traumatic event, and a company could lose valuable employees that it's invested a lot in. That's why, by the time cyclical unemployment starts to climb, the economy is usually already in a recession. Businesses wait until they're sure the downturn is severe before starting layoffs.
As stock market wealth evaporates, consumers delay purchases, waiting to see if confidence returns. If it does, as happened in the 1987 stock market crash, then economic growth resumes and cyclical unemployment doesn't get started. However, if confidence continues to erode, lowered demand forces businesses to lay off workers, resulting in cyclical unemployment. Follow the cycles in U.S. Unemployment Rate by Years.
Effects of Cyclical Unemployment:
Cyclical Unemployment Examples:
Someone can start out being cyclically unemployed, and wind up being being a victim of structural unemployment. During the recession, many factories switched to robots and sophisticated computer equipment to run machinery. Workers now need to get updated computer skills so they can manage the robots that now runs the machinery they used to work on themselves. Unfortunately, fewer workers are needed. Those that don't go back to school are structurally unemployed. That's because their skills no longer match the needs of the workforce.
Cyclical Unemployment Rate:
The first, and most common, method is to take the unemployment rate during the peak phase of the business cycle, subtract it from the unemployment rate during the trough phase, and chalk the rest up to cyclical unemployment.
The second is to compare the unemployment rate for recent college graduates with the unemployment rate overall. If their rate is similar to the overall rate, then most of the nation's unemployment is cyclical. Why? Recent college graduates have new skills, and are able to move to wherever the jobs are. Therefore, they have very little of the reasons for structural unemployment. Using this method, researchers found that the most of the unemployment in 2011 was cyclical. (Source: Bureau of Labor Statistics, Current unemployment:cyclical or structural?, March 21, 2011)
Cyclical Unemployment Solution:
If that's not enough, then expansionary fiscal policy must be used. This takes longer, because usually the President and Congress must vote on more spending. This raises the budget deficit. It also re-ignites the bi-partisan debate as to whether tax cuts or spending are more effective job creators. However, a U Mass/Amherst study shows that the most cost effective unemployment solution is spending on public works projects to create construction jobs. This makes sense, since these jobs are the most cyclical. The second is extending unemployment benefits. Tax cuts, according to the research, is less effective in creating the demand needed to stop cyclical unemployment. Article updated September 28, 2013