Cyclical Unemployment: The Causes, Types, And Examples

Causes of Cyclical Unemployment

Causes of Cyclical Unemployment

Economic Downturn

One of the primary causes of cyclical unemployment is an economic downturn. During periods of recession or depression, businesses experience a decline in demand for their products or services. This leads to a decrease in production and, subsequently, a decrease in the need for labor. As a result, workers are laid off, leading to an increase in cyclical unemployment.

Business Cycles

Cyclical unemployment is closely tied to the business cycle, which consists of alternating periods of expansion and contraction in the economy. During the expansion phase, businesses are growing, and there is a high demand for labor. However, during the contraction phase, businesses face a decline in demand, leading to layoffs and increased cyclical unemployment.

Industry-Specific Factors

Cyclical unemployment can also be influenced by industry-specific factors. Certain industries are more susceptible to fluctuations in the business cycle than others. For example, industries such as construction, manufacturing, and retail are often heavily impacted by economic downturns. When these industries experience a decline in demand, they are more likely to lay off workers, leading to an increase in cyclical unemployment.

Additionally, advancements in technology and automation can also contribute to cyclical unemployment. As businesses adopt new technologies and streamline their operations, they may require fewer workers, leading to job losses and an increase in cyclical unemployment.

Types of Cyclical Unemployment

Cyclical unemployment can be categorized into three main types:

  1. Classical Unemployment: This type of cyclical unemployment occurs when there is a decrease in aggregate demand in the economy, leading to a decrease in production and a subsequent decrease in employment. Classical unemployment is often caused by economic recessions or downturns in the business cycle. During these periods, businesses may be forced to lay off workers due to reduced demand for their products or services.
  2. Structural Unemployment: Structural unemployment is a type of cyclical unemployment that occurs due to changes in the structure of the economy. It is often caused by technological advancements, changes in consumer preferences, or shifts in global trade patterns. Structural unemployment can result in certain industries or occupations becoming obsolete, leading to a mismatch between the skills of the unemployed workers and the available job opportunities. This type of unemployment may require retraining or relocation of workers to find employment in other sectors.