Cyclical Unemployment: Causes, Examples & More

Unemployment has many types, causes and specific characteristics. While the pandemic and its aftermath created considerable economic changes, unemployment has always ebbed and flowed for a variety of reasons.

With the word “recession” in the air, you might be wondering where cyclical unemployment falls on the spectrum and what it entails.

Read on to learn more about:

  • Definition and examples of cyclical unemployment
  • Causes of cyclical unemployment
  • Ways to prevent cyclical unemployment

What is cyclical unemployment?

Cyclical unemployment is the percentage of people without work during an economic cycle. Economic activity usually follows fluctuations in gross domestic product (GDP). When GDP experiences a significant drop, layoffs and even recession can occur.

As economists study and predict trends toward cyclical unemployment, the government can employ its policymakers to create new fiscal and monetary policies to promote a stronger workforce and overall economic recovery.

The stages of cyclical unemployment

Because cyclical unemployment fluctuates and follows a pattern, it looks relatively similar each time it occurs. Read the stages of cyclical unemployment below.

1. A recession begins

Recessions can be caused by many things, some by a burst in the economy, such as the housing market crash of the Great Recession, and others are a slower burn of the business cycle.

Either way, consumer demand is down, making jobs scarcer because there are more people in the workforce than there is demand for goods and services.

2. Redundancies they occur

When demand falls, there are fewer profits and a surplus of workers. This means that companies have to lay off workers. This can lead to more people collecting unemployment benefits, which puts an even greater strain on the economy.

3. The recession is progressing

As the economic downturn continues, cyclical unemployment rates continue to fluctuate. All the while, economists analyze macroeconomics and microeconomics and their aggregate demand variables to predict trends and help the government create policies that can fuel the economy.

Macroeconomics examine general factors such as:

  • National markets
  • occupation
  • Gross inner product
  • inflation

Microeconomics examines little-picture factors such as:

  • Individual markets
  • Supply and demand
  • Goods and services

4. An economic recovery begins

The advantage of a recession is that the economy works in a cycle, just like cyclical unemployment. This means that the economic contraction may end, the economy may enter an upswing, and the pursuit of full employment may continue.

During this period, the business cycle begins to self-correct, consumer demand may increase, or the Federal Reserve may offer stimulus to boost the economy.

5. Employees return to work

In the final stage of the cycle, people begin to return to the world of work. Ideally, this may mark the beginning of lower unemployment rates. However, other types of long-term unemployment can occur due to a changing economy and its consequences.

Cyclical unemployment versus other types of unemployment

While cyclical unemployment is a temporary state based on the economy, other types of unemployment have different causes and characteristics. See below for some other types of unemployment that can happen in addition to cyclical unemployment.

Structural unemployment

Structural unemployment occurs when the economy changes and the labor market does not match workers’ skills. This is usually caused by changes in government policies or technological advances that replace human skills.

Frictional unemployment

Frictional unemployment occurs when an employee leaves a job by choice and looks for his next employer.

This can also refer to the gap that recent graduates may experience before finding their first job. Since workers are financially stable enough to support themselves during this proposed time off, it often indicates a healthy economy.

natural unemployment

Natural unemployment is an indicator that inflation is underway. An increase in the natural unemployment rate is often the result of a combination of structural and frictional unemployment, which can increase the cost of goods and services.

Related: Everything we know about unemployment benefits during the Coronavirus pandemic

10 examples of cyclical unemployment throughout history

Cyclical unemployment is directly related to cycles of economic recession. Tracking recessions throughout history can indicate cyclical unemployment in the US economy. See below for examples of each recession and the corresponding unemployment cycles since World War II.

1. End of Second World War: February 1945 to October 1945

The war led to substantial economic growth for the United States, with a great demand for jobs to support the needs of the military. However, when the war ended and government spending dried up, the job market collapsed and the economy followed.

Fortunately, this recession lasted less than a year as the manufacturing industry was able to adapt and create new non-war jobs, especially for construction workers.

2. Postwar Consumer Spending Slows: November 1948 to October 1949

During the war, there were government-ordered rations and restrictions. But when they stood up, American citizens went wild with the spending. However, after the spending spree slowed and soldiers struggled to find their new place in the workforce, the economy struggled to balance itself.

4. Asian Influenza Pandemic: August 1957 to April 1958

In 1957, a pandemic in Hong Kong spread to India, Europe and the United States. It killed more than a million people and crushed US exports by more than $4 billion, triggering another recession. During that time, unemployment rose to 6.2 percent.

Related: What does high unemployment have to do with your investments?

5. Foreign Automobiles and the Recession: April 1960 to February 1961

In the late 1950s, Americans took a growing interest in foreign cars, which was incredibly damaging to the US auto industry. This new fascination, combined with the rise in interest rates set by the Federal Reserve, led to a recession.

Related: 72% of economists He predicts a recession next year, if we’re not already in one

6. The oil embargo: from November 1973 to March 1975

In 1973 the Organization of Petroleum Exporting Countries imposed an oil embargo which caused gas prices to rise. This started a spending cut by Americans to save money. That, combined with inflation, wage freezes and layoffs, led to a stagnant economy and unemployment rising to 8.8 percent.

7. The double recession: July 1981 to November 1982

There was a very short-term recession due to an energy crisis just before 1980, but that was much more damaging. This recession was caused by inconsistent and low levels of oil exports, which caused prices to rise.

During that time, interest rates did not rise enough to curb the rate of inflation until the Federal Reserve raised rates to 21.5 percent. The increase created a ripple effect and pushed the statistics to a workforce with more than 10 percent of unemployed workers.

8. September 11 and the dot com crash: March 2001 to November 2001

In the late 1990s, the Internet burst onto the scene and many investors put everything into their new dot ventures. Because of this, non-established companies inflated to unsustainable levels and the bubble burst in 2001.

The dot com crash, combined with 9/11 and various corporate scandals, led to the first recession of the new millennium.

9. The Great Recession: December 2007 to June 2009

The Great Recession is the biggest financial collapse since the Great Depression. Strong investments led financial institutions to enter the mortgage market, specifically mortgage-backed securities.

However, homeowners lost their homes and investment banks collapsed when people defaulted on their loans. During that time, the stock market crashed, people lost their retirement funds, and 10 percent of Americans were unemployed. The government had to inject $1.5 trillion in stimulus money into the economy to fix this mess.

10. The COVID-19 Recession: February 2020 to April 2020

When the COVID-19 pandemic broke out, the world faced a financial crisis. With the lockdowns, job losses and a massive decline in consumer activity, the economy lost 20.5 million jobs and unemployment rose to 14.7 percent.

The government quickly stepped in with stimulus money, approving $6 trillion in relief.

Related: We could be heading for a recession, but a “bigger catastrophe” could be on the horizon

What does cyclical unemployment mean to you?

Cyclical unemployment is the percentage of people out of work during an economic cycle that generally predicts a recession. Throughout history, there have been multiple recessions that have caused fluctuations in unemployment rates.

When cyclical unemployment occurs, the government often uses a stimulus package to help push the economy into a more positive cycle.

Now that you’ve seen causes and trends throughout history, you may be able to identify signs of cyclical unemployment in today’s economy.

For the most up-to-date information on the economy, financeand the state of the work forcevisit Entrepreneur today.

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