We all know about the term unemployment, but the term cyclical unemployment may be a new one. Cyclical unemployment is a phenomenon that directly relates to the swings that happen in the economic or business cycle. As one of the three classes of unemployment, cyclical unemployment is the major contributor of high unemployment.
The cyclical unemployment may tend to increase sharply during the period of economic contraction or recession in a business cycle. However, cyclical unemployment is a temporary economic condition. When an economy enters into the phase of expansion, the rate of cyclical unemployment starts to decrease as the unemployed people will be re-hired.
Definition of Cyclical Unemployment
‘Cyclical’ unemployment or ‘demand deficient’ unemployment is the result of a general decline in the macroeconomic activity, which is the combined activity of all entities in the economy. This macroeconomic activity is cyclical that tends to move up and down instead of keeping a steady growth or fall.
Cyclical unemployment is the by-product of economic recession. During this period, the demand for goods and services drops and eventually the economic revenue declines. As a result, most of the companies want to lay off their excess employees to maintain a healthy profit margin. It means that the GDP per capita of the country reduces and the rate of cyclical unemployment go beyond the level of equilibrium.
The main cause of the economic downturn is the stock market crash. It can create panic in the economy as businesses may suffer great loss. The stock market crash may lead to recession and pave the way for crucial unemployment. If the recession persists for long-time, it may end in great depression and may last for a decade. It is not an easy task to get over from depression.
The major impact of cyclical unemployment is a rise in the rate of unemployment. The recession makes young people difficult to get a job. It reduces their work experience and makes them difficult to get a better job opportunity. The recession also makes employed people unemployed for a long time.
The great depression of 1929 is one of the most important examples of cyclical unemployment. As a worldwide phenomenon, the great depression made the entire economy panic. According to some economic analysts, the great depression raised the rate of unemployment up to 40% than ever before. It began as a result of the stock market crash in 1929 and lasts till 1939. Millions of investors wiped out from the economy during that time.
The financial crisis of 2008 is the recent example of cyclical unemployment. Many economists consider this the worst financial crisis after the great depression of 1929. It began as a crisis in the mortgage industry and developed into a full-fledged financial crisis.
As the most important contributor to unemployment, the increased rate of cyclical unemployment make the people more panic and anxious. Usually, the recession may last around two years and more. The recession can be defeated by increasing the GDP per capita of the country. The possible way to increase the GDP rate is by uplifting the entire economy. It is the responsibility of the government to provide various fiscal policies- lower the interest rates and make the loans and credit card payments easier- that are effective to strengthen the economic condition.