Economies all across the world have always been interrelated in many aspects. This is what we witnessed in the Great Depression of 1929, when the US economy was hit by the worst economic crisis in its history, after the crash of US stock market. The Great Depression not only affected the US economy but also the global economy, as international commerce and trades declined drastically.
The ongoing recession, since the year 2008, similar to the Great Depression, caused large-scale unemployment all across the world, especially in the U.S.A. One of the striking features of both these economic recession periods has been that the world economy recovered from them, after several years. Though, it may take many years to recover from an economic crisis, recovery does occur. Employment is created as the economy comes back on track. A temporary unemployment that occurs due to recession is generally called cyclical unemployment. The positive thing about this form of unemployment is that, it is not permanent and jobs are recreated, as the economy returns to normalcy.
Understanding Cyclical Unemployment
Unemployment due to recession, inflation or the sudden crash of economies that results in unemployment on an unprecedented scale, is categorized as cyclical unemployment. As the name suggests, 'cyclical' unemployment stands for a cycle of economic activities that occur to a business when the economy starts functioning negatively, due to poor market conditions. To understand it in more technical terms, let us know what constitutes the business cycle of a firm. A business cycle is the series of economic ups and downs that a company faces during its operational years. It is a normal cycle of economy and almost all companies have to go through it several times during their existence in a global economy.
There are four main components of a business cycle, namely, economic upturn, the economic peak, the economic decline, and the economic recovery. Understanding cyclical unemployment is like journeying through all the phases of a business cycle. It is directly related to requirement of workforce. If there is a demand of products, labor intensive industries hire lots of workers and there are plenty of jobs (economic upturn). As the business boosts, there is a growth and expansion of the business and workers or employees benefit tremendously (economic peak).
In the initial phase of recession, that is when unemployment gets triggered a bit, there is a loss in the business, there is less demand of workers and eventually, company has to cut down their labor force, to sustain the business (economic decline). In worst phases of economic decline, unemployment is at its peak. As time passes, new economic policies and changing market factors bring back the economy on track (economic recovery) and jobs are created again. So, as you can observe, it goes like a cycle of events and so the jobs losses are termed as cyclical unemployment.
Economies and markets all across the countries go through the vicious cycle of unemployment in harsh economic conditions and it is observed in many sectors. A classic example of this is unemployment created in the auto industry during recession phase. The lack of demand forces the production down which makes many auto manufacturing plants to shut down or manufacture less automobiles which in turn results in job cuts and unemployment. Similarly, demands of labor forces in infrastructure projects all across the gulf countries creates millions of employments for people in Asia. When recession in real estate occurs, labors are forced to return to their homelands.
In a nutshell, cyclical unemployment can be stated as an unemployment that eventually occurs in an economy when there are not sufficient jobs for everyone who is capable and willing to work. This occurs in a typical cycle, as demand of products, good and services is decreased, production is hampered and finally, lesser workers are needed for work. This was just a brief guide on cyclical unemployment that hopefully, must have given you some perspective about it.