Cyclical Unemployment: Definition, Causes and How to Calculate

What is Cyclical Unemployment?

Cyclical unemployment refers to the type of unemployment that occurs because of the fluctuations in economic cycles. It rises and falls in response to the upturn or downturn in the economy. When the economy is doing well and experiencing steady growth, cyclical unemployment is lower. In this time of economic expansion, there is an increase in sales and higher demand for workers.

However, during an economic recession, cyclical unemployment is highest due to decreased consumer demand for goods and services, reduced production and job opportunities and increase in job layoffs, further increasing the number of unemployed workers. Cyclical unemployment results in a slowdown of overall economic growth and makes it difficult to maintain basic living standards of the people. 

Causes of Cyclical Unemployment

Economic Recession:

• During a recession, businesses face decreased demand for their products and services, leading to lower production and layoffs.

Decline in Business Investment:

• When businesses cut back on investment in new projects, expansion or capital goods, it leads to slower economic growth and reduced hiring

Falling Industrial Output:

• Decrease in production levels of goods and services by industries that reduces the workforce required.

Stock Market Crash:

• Causes panic and a loss of confidence in investors and consumers. Consumers may postpone purchases until they feel more confident about the market and the economy.

How to Calculate Cyclical Unemployment Rate ?

To calculate cyclical unemployment, use the following formula:

Here, 

• Current Unemployment Rate is the total percentage of unemployed workers 
  • Formula used to calculate this: (Number of unemployed workers/ Total labor force) x 100

• Frictional Unemployment Rate is the percentage of total number of workers who are voluntarily shifting their jobs. 
  • Formula used to calculate this: (Workers looking for jobs/ Total labor force) x 100.
• Formula used to calculate this: (Number of structurally unemployed workers/ Labor force) x100.
  • Structural unemployment Rate is the percentage of workers who are unemployed due to long-term changes in the economy, such as shifts in industry or technology.