The Ultimate Guide About Cyclical Unemployment

According to the International Labor Organization, there could be a loss of almost 25 million jobs worldwide due to COVID-19. The rate of unemployment reflects the condition of a country’s labor force. There are three main types of unemployment, and the type of unemployment that occurs because of a recession is called cyclical unemployment.

Unemployment & Cyclical Unemployment

Unemployment, also referred to as joblessness, happens when people are without jobs while actively seeking jobs. To calculate the unemployment rate, we can divide the number of unemployed people by the total labor force. Then multiply the result by 100%.

the type of unemployment that occurs because of a recession is called
Unemployment Rate Formula. Source: Image: WallStreetMojo

The economists categorize unemployment into frictional, structural, and cyclical. Frictional unemployment is short-term unemployment when workers haven’t found new jobs after voluntarily quitting their old jobs. Structural unemployment happens due to a mismatch between the jobs available and the skill levels of the unemployed. The type of unemployment that occurs because of a recession is called cyclical unemployment. Theoretically, cyclical unemployment refers to the unemployment triggered by a decline in business activity during a period of recession or a downturn in a business cycle.

When the business cycle is at its peak, the cyclical unemployment rate will be low due to the total maximized economic output. That output requires maximum possible labor as input. As economic production declines, the business cycle is close to its trough, and cyclical unemployment rises. If cyclical unemployment is eliminated in the economy, then all current unemployment is frictional or structural, and the unemployment rate is the natural unemployment rate.

The fall in consumer demand for products or services can result in a corresponding decrease in production. The falling supply demands fewer laborers, and firms’ layoffs reduce the labor force size.

Calculation of the Cyclical Unemployment Rate

We can determine cyclical unemployment by subtracting the structural unemployment rate and the frictional unemployment rate from the current unemployment rate. 

cyclical unemployment rate
The formula for the cyclical unemployment rate. Image: WallStreetMojo

 Unemployment Rate: The unemployment rate is the proportion of the total workforce jobless but actively finding jobs. 

Frictional Unemployment Rate: The frictional unemployment rate is the rate of short-term unemployment when people change from one career to another.

Structural Unemployment Rate: The structural unemployment rate is the percentage of the total labor force involuntarily unemployed due to skill mismatch. High-tech advancement, business competition, or government policies make part of the labor force obsolete.

The Impacts of Cyclical Unemployment

According to Okun’s Law, when unemployment is actually 1% higher than natural unemployment in the US economy, the actual output is 2.5% less than the potential output. 

In terms of cyclical unemployment’s impacts, unemployed individuals lose their wages and receive unemployment benefits. Moreover, the government loses income from taxes and has to expand subsidies. This can lead to government budget deficiency, a low interest-rate environment, and a high inflation rate. 

Defense Against Cyclical Unemployment

A common fallacy is that doing the best at the job is adequate protection against cyclical unemployment. However, that is not true. There is no way to protect you from losing your job in many situations since the layoff has nothing to do with work performance.

The capability to prevent layoffs is not entirely within your control. But there are tips and practices to prepare and increase your employment chance during a hard time.

Keep Updated With the News

Due to the sudden shutdown of many businesses during a recession, your job may be in danger. Therefore, you should keep updated with news about economic conditions and your company’s business. This helps you to take bold steps like choosing another job in another field to improve your long-term employment. At any time, there are “future” industries with prosperous employment aspects in the near future regardless of the economic cycle.

Never Stop Improving Yourself

The career path today seldom goes straight, so you need to upgrade or retrain your skills to remain competitive in your industry. In other words, you should be willing to learn everywhere to improve yourself. This helps you gain an edge over other workers. Moreover, competitive employees with updated skills have the highest chance of getting a good job, even during an economic downturn.

Grow Different Sources of Income

In addition to your daily work, another way of protecting yourself is by getting additional income sources. For example, you can become a private tutor, invest in real estate, sell products online, start a blog, pick up online freelance work, etc.

Note that this extra income source often usually requires a decent investment of time or money to start. However, it will reduce the financial burden and you have more time to do this additional stuff in case you are laid off. It’s going to keep you busy and allow you to earn more money from these sources in addition to regular income sources when you get back to full-time work.

Conclusion

In a nutshell, the type of unemployment that occurs because of a recession is called cyclical unemployment. It is frequently unpreventable as an outcome of the natural downturn in the economic cycle of a country. However, you can still make some preparations to minimize cyclical unemployment’s negative impacts.

SEE MORE:

—> Essentials About Current Maturities of Long-term Debt

—> A Multi-Step Income Statement: Simpler Than You Think

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