We all probably know what unemployment is, but not all the different types of it. In this lesson, you’ll learn about cyclical unemployment and be provided some examples. You’ll also have a chance to take a short quiz.
Definition of Cyclical Unemployment
Cyclical unemployment is unemployment that results when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction. Let’s explore this type of unemployment in a little more detail.
Cyclical Unemployment and the Business Cycle
Cyclical unemployment is directly related to the level of macroeconomic activity, which is the aggregate, or combined, activity of all persons and entities involved in an economy. This aggregate activity is cyclical instead of linear – economic activity tends to rise and fall, instead of always rising or always falling.
Let’s look at increases in the business cycle first, and their effect on unemployment. When economic activity increases, we call this an expansionary phase of the business cycle because it represents economic growth. Unemployment tends to drop during periods of growth because consumers are buying more and businesses are producing and selling more. These increases in production and sales usually require more people, resulting in increased hiring and an overall reduction of the rate of unemployment.
Now let’s turn to the bad news. When economic activity slows, or contracts, unemployment will increase. During times of slow growth, no growth or a period of economic contraction, a recession, demand for products and services declines. Employers make less, sell less and don’t need as many employees. Employers will lay off those employees who are not needed, which raises the unemployment rate. This increase in unemployment can lead to a problematic feedback loop where unemployed people can no longer afford to buy stuff, which means that demand decreases even further and more people are laid off, leading to even less demand and so on.
Example One: The Housing Market
Let’s take a look at a few events that may trigger cyclical unemployment.
During a housing boom, there is a period of tremendous economic growth. Building houses is a labor- and material-intensive activity. Just think of all the construction workers who build a house. You have carpenters, electricians, plumbers, masons, concrete workers and roofers. You also employ real estate agents, loan officers and loan brokers.
But that’s just half of the story. Let’s not forget about the people and companies that harvest the lumber for the house and the metal used for wiring and pipes. Then we have the people and businesses that make carpets, hardwood flooring, appliances, lighting and other fixtures that are installed in a typical home. Finally, we mustn’t forget about all the middlemen, such as retailers and suppliers.
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