A Business Encyclopedia

Cyclical Unemployment

Definition: The Cyclical Unemployment refers to the change in the employment rate due to the change in the economic cycle, such as recession and inflation. Simply, the change in employment due to the fundamental shifts in the economy is called as cyclical unemployment.

The economy suffers several ups and downs and has a direct impact on the employment rate. During a recession, the unemployment increases as the demand for the commodities fall which leads to less production and ultimately fewer workers are needed. The economic recession is characterized by less demand, less production, and fewer workers. Under this scenario, the employers produce less and sell less and lay off their employees due to less demand in the economy, which results in the increase in the unemployment rate. Therefore, the number of unemployed workers exceeds the number of job vacancies.

On the other hand, when the economy grows the rate of unemployment decreases as the consumers demand more goods and services, the production increases and ultimately more workers will be hired to meet the demand. This stage is also called as an expansionary stage. Thus, the economic growth is characterized by more aggregate demand, more production, and more employment.

It is clear from the above explanations that unemployment rate is directly related to the economic cycle.

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