Cyclical Unemployment

Published Dec 27, 2022

Definition of Cyclical Unemployment

Cyclical unemployment is defined as unemployment that results from a lack of aggregate demand in the economy during economic downturns. That means it occurs when there is not enough demand for goods and services, which leads to a decrease in production and an increase in unemployment.

Example

To illustrate this, let’s look at an imaginary economy called the Land of Plenty. This economy is doing well during its current economic upturn, with a low unemployment rate and a healthy GDP growth rate. The government cut taxes and increased spending a few years ago. This led to an increase in aggregate demand, which in turn led to an increase in production and employment.

But now, this year, the government has decided to reverse its policy and raise taxes and cut spending. This leads to a decrease in aggregate demand, which in turn leads to a decrease in production and an increase in unemployment. This increase in unemployment is an example of cyclical unemployment.

Why Cyclical Unemployment Matters

Cyclical unemployment is a helpful concept for understanding the business cycle. It is a key indicator of the health of an economy and can be used to measure the effectiveness of government policies. For example, if the government implements a policy that leads to an increase in cyclical unemployment, it is likely that the policy is not working as intended.

In addition, cyclical unemployment can also be used to measure the impact of economic shocks. For example, if an economy is hit by a recession, the cyclical unemployment rate will likely increase. This can be used to measure the severity of the recession and the effectiveness of any countermeasures taken by the government.