The cyclical unemployment is a factor of general unemployment that is related to the regular ups and downs, or cyclical trends, existing in growth and production, that occur within every economic 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, measured by 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 decreases, a corresponding reduction in the output of supply can occur to compensate for such a situation..
As supply levels are reduced, fewer employees will be required to meet the standard of lower production volume.
Those workers who are no longer needed will be released by the company, resulting in those workers being unemployed.
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Cyclical unemployment happens when workers lose their jobs due to downturns in the business cycle. If the economy contracts for two quarters or more, it will find itself in recession.
Economists describe cyclical unemployment as the consequence of firms not having enough demand for labor to employ all job seekers at that point in the business cycle..
Most business cycles are repetitive in nature, as a slowdown will eventually shift to an economic rebound, followed by another slowdown..
It is common for cyclical unemployment to be the main cause of high unemployment. Unemployment is considered high if it exceeds 8% of the workforce. It is known as cyclical because it is linked to the economic cycle.
When the economy re-enters the expansion phase of the business cycle, the unemployed will be rehired. Cyclical unemployment is temporary, it depends on the duration of the economic contraction. A typical recession lasts about 18 months, and a depression can last 10 years.
Cyclical unemployment is one of the three main types of unemployment recognized by economists. The other types are structural and frictional..
In most cases, there are several types of unemployment at the same time. With the exception of cyclical unemployment, the other types can occur even in the highest ranges of business cycles, when the economy is said to be near or within full employment..
Cyclical unemployment becomes structural when workers remain unemployed long enough to acquire new skills and thus be competitive when the economy begins to expand and companies start hiring again..
Changes in the business cycles of companies cause cyclical unemployment. This is related to the business cycle of an economy.
It occurs when there are job losses during recessions and contractions in the business cycle. To cause this type of unemployment you do not need a real recession, which is when an economy has negative growth for two or more consecutive quarters..
Lack of demand for products is one of the main factors causing cyclical unemployment. It usually begins with decreasing personal consumption. When there is a drop in consumer demand, business revenue generally declines.
Consequently, companies have to lay off workers in order to reduce costs and thus maintain their profit margins. Often not enough production to keep workers busy.
What a company least wants to do is have to lay off its workers. It is a traumatic event. A company could lose great employees in whom it has invested a lot of time and effort.
So by the time cyclical unemployment begins, the economy is generally already in recession. Companies wait until they are sure that the slowdown is serious, before starting with layoffs.
What can start an economic slowdown, which translates into cyclical unemployment? It is often a stock market crash. Examples in the US include the crash of 1929, the technology crash of 2000, and the financial crash of 2008..
A bad crash can cause a recession, creating panic and loss of confidence in the economy. Companies suffer a loss of their net worth when stock prices crash.
During the 2008 financial crisis, the US housing bubble burst, starting a major recession and facing cyclical unemployment.
As more and more borrowers defaulted on the debt obligations associated with their homes, and subprime mortgage lenders declared bankruptcy, qualifications for new loans tightened, decreasing demand for new construction..
As a result, approximately two million people employed as construction workers lost their jobs and experienced cyclical unemployment..
As the total number of unemployed increased and with more and more borrowers unable to pay for their homes, more properties were subject to foreclosure, making the demand for new construction even lower.
As the economy recovered in the following years, the financial sector became profitable again and began to make more and more loans..
People started buying houses again, causing real estate prices to rise again.
Cyclical unemployment can become a self-feeding downward spiral. That's because the newly unemployed now have less disposable income. This further reduces business demand and revenue, leading to more layoffs..
Without intervention, this spiral will continue until supply has been reduced to catch up with limited demand. This may not happen until unemployment reaches possibly 25%.
This is what happened during the Great Depression, which lasted for a decade. In fact, what really ended the depression was the great demand for military equipment, when the United States entered World War II..
Someone can be cyclically unemployed and then become a victim of structural unemployment. During a recession, many factories switch to sophisticated computer equipment to operate machinery.
Workers now need to gain up-to-date computer skills to be able to manage the robots that operate the machinery, which previously worked with them.
Fewer workers are also needed. Those who do not return to school will be structurally unemployed.
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