Cyclical Unemployment: Defined And Explained

Cyclical unemployment occurs when employers reduce their labor force due to economic downturn and tends to be a natural consequence of the economic cycle. If you’re an unemployed person due to company downsizing, you are likely cyclically unemployed. Understanding what cyclical unemployment is and its causes may help you better understand your situation.

What Is Cyclical Unemployment?

Cyclical unemployment results from fluctuations within the economy’s business cycle. When the economy enters a recession, more employees are generally laid off from their job. Conversely, when we enter an expansion, more jobs are generally available.

In other words, cyclical unemployment occurs when economic demand is too low to support peak employment. This happens during slow economic growth and other periods of economic contraction.

With fewer people buying goods and services, companies need fewer people to produce, sell and maintain them. That means they might need to reduce their workforce, which can cause economic growth to falter as the labor market shrinks.

What Are The Stages Of Cyclical Unemployment?

Though not always so cut and dried, here are the typical stages of cyclical unemployment.

1. The Economy Enters A Recession 

A recession, though it has many definitions, is generally thought of as a significant and widespread downturn in economic activity.

Economists tend to anticipate a recession when there are two consecutive quarters of negative gross domestic product (GDP) growth. Others also look at industrial production, retail sales, and indicators such as nonfarm payroll (workers that are not employed by nonprofits, the military, their own business, or a farm).

2. Layoffs Take Place

Businesses that aren’t producing as much as they were previously and aren’t seeing growth in revenue will either reduce their workforce through a layoff, completely stop hiring workers, or both.

3. The Recession Continues

As long as there is a slowdown in the growth of the GDP, the recession will continue and there may be fewer job openings. More companies may experience layoffs and workers may find it difficult to find full time employment.

4. The Economy Begins To Improve

Once the economy is out of the recession (i.e., the GDP begins to grow instead of shrink) and starts to experience an expansion, there is more demand for goods and services and companies may start to hire more employees or add hours for existing ones.

At this point, the unemployment rate may begin to go down, which means less people are without work.

5. People Find Jobs

The more job openings there are, the more opportunities there are for people to find work. Companies may also continue to open new job postings on an ongoing basis as long as the economic conditions allow.

Cyclical Unemployment Example

In March 2020, the economy was in a period of growth until the COVID-19 pandemic. As a result, there were mass shutdowns as people obeyed shelter-in-place orders for their health and safety.

As nonessential businesses shut down, the GDP fell and many American workers (as well as workers in other countries) lost their jobs. This shock to the economic system – due to the pandemic and shrinking labor market – is likely to have long-lasting repercussions, the details of which aren’t fully known yet.

The Great Recession in 2008 provides other examples of cyclical unemployment. Due to the struggles of the housing market, fewer homes were being built and as a result, construction workers were laid off.

Other Types Of Unemployment

Unemployment can happen for many reasons. Aside from cyclical unemployment, there are other types of unemployment that can affect your job prospects.

Frictional Unemployment

Frictional unemployment occurs when there is a mismatch of available jobs and employees. Examples include new graduates seeking a starting position or an existing employee who wants a better job by choice.

Frictional unemployment dissipates when prospective employees are matched with potential jobs and are able to leave their previous position. And that’s easier than ever today, thanks to social media and online job boards where workers can spread the word and quickly assess available opportunities.

When the economy is suffering from cyclical unemployment, frictional unemployment tends to go down. That’s because workers who are fortunate to have jobs aren’t eager to leave them.

Structural Unemployment

Structural unemployment refers to workers losing their jobs because of long-term shifts in the economy (such as new technology, policy, or globalization) that rendered their skills obsolete and eventually opened up new jobs requiring different skills. For example, when manufacturing automation was implemented, those who specialized in working on an assembly line or in a fabrication shop found themselves out of jobs unless they were able to reskill.

Seasonal Unemployment

Think ski resorts in the summer or ice cream shops in the winter. Seasonal unemployment can be due to conditions such as demand for a particular activity waning or can depend on travelers visiting a destination during vacation season.

While most vacation-related businesses staff up accordingly for their busy season, many have figured out ways to keep demand high by pivoting their business model to appeal to consumers year-round, which can reduce seasonal unemployment to a degree.

What Can Be Done To Reduce Cyclical Unemployment?

With time, the economy will stabilize and then begin growing again. Some unemployment is the part of the business cycle, and businesses usually begin hiring new employees as they experience a high demand for goods. Those employees then have money they can in turn spend on goods and services, and the cycle begins anew.

The problem is that it’s impossible to predict how long unemployment might last. It can go on for the short term or long term, depending on the problems that caused it and how smoothly the general economy emerges.

Though there isn’t necessarily anything you can personally do to reduce cyclical unemployment, the U.S. government may be able to through fiscal policy.

There are a number of “levers” that the Federal Reserve can rely on as part of a monetary policy strategy to combat cyclical unemployment. An important one that the Federal Reserve spearheads involves interest rates. The board will raise interest rates to prevent inflation when the economy is beginning to overheat, and on the flip side can lower them to encourage new investment and increased economic activity.

FAQs About Cyclical Unemployment

The following are some frequently asked questions about cyclical unemployment.

What causes cyclical unemployment?

Cyclical unemployment occurs when there are various changes to the economy’s business cycle. As a result, businesses will often start reducing their workforce and enforcing layoffs.

What are the effects of cyclical unemployment?

Some effects include job loss at a large scale and increased drop in profits for businesses.

What is a high cyclical unemployment rate?

A high cyclical unemployment rate is when the number of jobs is much lower than workers available. The “normal” unemployment rate hovers around 3% to 5%.

How can I protect myself from cyclical unemployment?

You can prepare yourself from cyclical unemployment by making sure you are learning new skills so you can look for another job if needed, and finding additional income sources like working on side hustles or arranging for passive income.

The Bottom Line

If you’ve been impacted by cyclical unemployment, there’s no question it can feel devastating. But it can help to know that often it has nothing to do with you – and everything to do with current economic conditions.

However, that’s cold comfort when you need a job. That’s why it’s important to do everything you can while you’re employed to prepare for this “rainy day.” That might include pivoting your career to a more in-demand function or industry, exploring passive income or side hustles, and making sure to keep your financial house in order.

You might want to take steps to build up an emergency fund and plan a budget that allows you to temporarily slash spending in certain areas when needed. To help, consider using the Rocket Money℠ mobile app to monitor your finances and stay on top of bill payments – especially during times of financial uncertainty.