Why Cyclical Unemployment Occurs and 4 Ways to Protect Yourself From It

While it has become a normal part of everyday life, when the internet first entered the mainstream in the mid-to-late-90s, it was a phenomenon in every sense of the word. However, the average unemployment rate in 1999 and 2000 hovered around 4 percent due to the dotcom crash that led to a period of global cyclical unemployment. 

By 1999, investors were making loads of money in this new frontier. However, by 2000, it had all come crashing down. Online companies had gone out of business, investors had lost millions, and many people became unemployed as a result. By 2001, unemployment was close to 6 percent. 

This is just one example of an economic downturn that resulted from various outside forces, which affected workers across multiple industries. During periods of high unemployment and an uncertain labor market, cyclical unemployment is often a factor. If you’ve ever felt frustrated or even fearful about job prospects, cyclical unemployment may be the reason. But it can also be a source of hope when the future looks bleak.

In this article, learn what cyclical unemployment is, what causes it, examples of it in recent history, and how it can be reduced. Also, learn tips that can help prevent you from becoming a cyclical unemployment victim.

What Is Cyclical Unemployment?

Cyclical unemployment occurs when more workers become unemployed due to economic changes and regular business cycles. Periods of slow economic growth or even decline, like during a recession, lead to high rates of cyclical unemployment. “[W]e are looking at an economy in which people are less likely to consume, for any given reason,” writes Prateek Agarwal, founder of The Intelligent Economist and member of the Financial Writers Society. “The ultimate outcome of this is unemployment.” Conversely, the cyclical unemployment rate will be low during periods when economic activity is high, the labor force is healthy, and industries are growing.

Fortunately for those who suffer from cyclical unemployment, time without a job is usually temporary and relatively brief. Cyclical unemployment is different from a case of job abandonment, where someone simply stops showing up for work.

Causes of Cyclical Unemployment

The root causes of cyclical unemployment can come from a variety of areas. The following are just some of the reasons people may find themselves without a job.

• Changes in consumer spending: When the economy begins to decline, consumers will often change their spending habits. This often leads to a decline in the demand for goods and services in certain industries.
• Decrease in investments: A downturn in the economy usually means investors are more frugal in how they spend their money. That means less money for new projects, resulting in a lower demand for machinery and equipment, which can affect workers in those areas.
• Government policies: In some cases, cyclical unemployment results from changes to government policies on both the state and federal levels. Some of these changes—such as raising taxes or interest rates—can contribute to the problem.
• Shifts in technology: Another influence on cyclical unemployment can be technological advances. Businesses may decide to invest in new technology and automation as a way to cut costs and increase efficiency. Sometimes this can result in job losses for the workers who are replaced by machines.
• Financial crises: A severe economic crisis can lead to worsening employment problems. Credit freezes, banking failures, housing market downturns, and more can lead to reduced economic activity. Businesses may react by downsizing or even shutting down.

Examples of Cyclical Employment

Whenever there’s a dip in the health of the economy, cyclical unemployment often follows. The dotcom crash is just one instance of this. The following are historical examples—some recent, some not so recent—that saw this type of unemployment significantly impact people.

The Brief Post-World War II Slump

The ending of World War II was a time of celebration, but it did lead to some negative effects that were hard to anticipate. In the waning months of the war, government spending decreased significantly. What resulted was a massive collapse in the labor market. Luckily, as is often the case with cyclical unemployment, the decline was far from a long-term problem, and the economy was able to recover for what would be a period of sustained growth.

The Asian Flu Pandemic

Cyclical unemployment tends to occur with worldwide pandemics. Though not as deadly as COVID-19, the Asian Flu pandemic in the 1950s had a detrimental impact on U.S. exports. This led to a recession as unemployment rose due to decreased global demand for American goods.

The Early 60s Recession

A lesser-known event, the recession that occurred in the early 60s, was caused by several factors including a shift in consumer spending. Before this time, the United States led the world in automobile manufacturing by a wide margin. But toward the end of the 1950s, more consumers were looking at foreign manufacturers for their cars. This hurt the automobile industry in the U.S. significantly, creating a period of cyclical unemployment as the country entered a recession.

The 2008 Great Recession

After a massive crisis hit the banking and housing centers toward the end of the 2000s, multiple industries felt the effects as millions of workers were laid off. One area hit particularly hard was the construction industry. With the contraction of the economy, many building projects were put on hold, resulting in a lack of work for construction workers throughout the country. While the world and these industries were eventually able to bounce back, progress was slow for a period of several years.

The COVID-19 Pandemic

Beginning in 2020, the COVID-19 pandemic and its accompanying lockdowns affected nearly every facet of the economy. Many businesses had to close while others put workers on furlough or reduced their hours. According to the National Bureau of Economic Research, temporary layoffs accounted for 98 percent of the increase in the unemployment rate. Most consumers changed their spending habits, resulting in a sharp decline in spending at restaurants and bars. With decreased demand for goods and services, the unemployment rate shot up as millions were left without work. It can be argued that the world is still feeling the economic effects of the lockdowns, though there has been a great deal of recovery since those difficult days.

Other Types of Unemployment

To better understand cyclical unemployment, it’s important to look at different types of unemployment to see how they compare.

Seasonal Unemployment

When the demand for specific jobs fluctuates according to the season, seasonal unemployment can happen. For example, lifeguards are in high demand in most places in the country during the hot summer months. Come winter, however, there’s not as much need for them. Seasonal unemployment usually has little to do with economic factors but rather simply what time of year it is.

Structural Unemployment

The factors that lead to structural unemployment persist deep within the economy. The most common form this type of unemployment takes is when there are a lot of workers with a specific set of skills, but the current job demand doesn’t require those skills. An example of this is the rise of automated systems putting many people out of work. Unlike cyclical unemployment, structural unemployment can last for a much longer time. To find a job, some workers may have to abandon their current skills and seek new ones.

Frictional Unemployment

Unlike some of the other types of unemployment on this list, frictional unemployment doesn’t have an unpleasant feeling that accompanies it. This type of unemployment merely indicates that someone who doesn’t have a job right now is looking for one. That might mean people going from one job to another voluntarily, or it could mean they’re entering the workforce either for the very first time or after a lengthy hiatus.

Institutional Unemployment

In cases of institutional unemployment, government policies and other social issues are largely responsible. Some examples of this occurring include the presence of selective occupational licensing and the introduction of a high minimum wage. One factor separating this from cyclical unemployment is that the policies and laws enacted are usually a long-term obstacle toward more employed workers.

How to Calculate Cyclical Unemployment

Economists have come up with a way to calculate the cyclical unemployment rate with the following equation:

Cyur = Cur – (Fur + Sur)

This cyclical unemployment formula calculates this type of unemployment by adding the frictional unemployment rate (Fur) and structural unemployment rate (Sur), then subtracting that sum from the current unemployment rate (Cur). The resulting number shows what percentage of the unemployed workforce does not have a job due to cyclical economic fluctuations.

How Cyclical Unemployment Can Be Reduced

As with most types of unemployment, the government has looked for ways to reduce cyclical unemployment to ensure more people have a job. Here are just some of the tools governments have in their arsenal.

• Government stimulus: As seen during the COVID-19 pandemic, the government can send out money directly to individuals and families as a means to spur economic activity.
• Cutting taxes: By lowering taxes, people will have more money in their pockets for consumer spending purposes.
• Lower interest rates: The Federal Reserve Bank may cut interest rates to encourage borrowing money at times when it can make a difference.
• Educational investments: By funding more education and training opportunities, government programs can help people learn the skills to find work quickly.
• Greater economic diversification: A more diverse economy can withstand sudden changes and bounce back more quickly.

How to Protect Yourself From the Ebb and Flow of Cyclical Unemployment

Even though it’s usually temporary, cyclical unemployment can seem like a frightening prospect. Fortunately, you’re not without helpful strategies that can protect you from its worst effects.

1. Learn New Skills

Sometimes unemployment can stem from a lack of versatile skills. To help yourself, take the time to learn new skills with regularity. You’ll likely have to do this on your own free time, but the more skills you have, the more places you’ll be able to turn to when you need to find a new job. In this way, you won’t get stuck in a narrow industry where you can get pushed out.

2. Research Promising Jobs

Doing a bit of research can help identify which jobs will be in high demand in the future. These are usually jobs that can withstand economic downturns or technological changes. When you know which jobs hold the most promise, you can look into developing a skill set that prepares you in case you need it.

3. Look for a Temporary Job

While a temporary job isn’t an ideal situation, it can help fill the gap between more long-term solutions. Recruiters generally don’t like to see large gaps in a person’s work history, so a temporary job can keep your skills sharp while you wait for the economy to recover. Remember, cyclical unemployment is usually a temporary thing, so if you just wait out the storm with a temp job, the clouds will clear eventually.

4. Try a Side Hustle

One thing you can do is start a side hustle. There are many side hustles you can do from the comfort of your own home. While they may not make up for a loss of income, side hustles can help you make ends meet during the brief period of time you find yourself looking for work.

Prepare Now for the Bumps Ahead

Unemployment for any stretch of time can eventually lead to mounting debt. However, when you practice thoughtful budgeting strategies, you ensure you’re saving money for a time when you might need it. Here are some quick budgeting tips you can start trying today.

• Detailing your income and expenses
• Adopting thrifty habits
• Budget 50 percent for needs, 30 percent for wants, and 20 percent for savings
• Work on paying off your debts as quickly as possible
• Use budgeting tools to organize your plans
• Regularly adjust your budget as needed

If you’re disciplined with your budget, you’ll be able to save money and get through a time of unemployment.

Still looking for some additional income? Check out the following article.

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