The term cyclical unemployment refers to the availability of jobs as a result of business and economic expansions and contractions. Cyclical unemployment increases when the economy contracts and decreases when the economy expands.
Cyclical unemployment is the term used to describe the effects the economy has on the availability of jobs. When the economy enters into a recession, typically as measured in terms of the country’s Gross Domestic Product (GDP), personal consumption declines. As the demand for a business’s products or services decline, their revenues will also start to decline. In order to maintain profitability, companies will attempt to lower their expenses, including laying-off workers. The opposite happens when the economy expands. Personal consumption is on the rise, and businesses need additional workers to meet the increase in demand for their products or services.
These cycles of increases and decreases in the need for workers will result in higher or lower levels of unemployment. Since these economic cycles can last from eighteen months to as long as ten years, cyclical unemployment falls into the larger classification of “temporary” unemployment.
Governments will oftentimes take action when cyclical unemployment increases. For example, as businesses begin to lay-off workers, aggregate personal consumption will continue its decline. As the demand for products and services decreases, businesses will start another round of lay-offs in an attempt to control costs. Some economists believe government intervention is necessary to keep cyclical unemployment from spiraling out of control. One of the tools the federal government has to combat a recession is lowering interest rates. When interest rates are low, personal consumption increases, thereby increasing the demand for products and services.