Chapter 7: Problem 19

When would you expect cyclical unemployment to be rising? Falling?

Short Answer

Expert verified

Cyclical unemployment is expected to rise during a recession, characterized by reduced GDP growth, increased business closures, and decreased consumer spending. Conversely, it falls during an economic expansion when GDP growth increases, business closures reduce, and consumer spending rises. It is essential to remember that cyclical unemployment is only one type of unemployment, and other types, such as structural and frictional unemployment, must be considered when examining the overall unemployment rate.

Step by step solution

1. Identifying Economic Conditions that result in Rising Cyclical Unemployment

Cyclical unemployment rises during a recession, as companies lay off workers due to decreased demand for goods and services. When businesses see a decline in sales and consumer demand, they tend to cut costs, which often includes laying off workers. This causes the cyclical unemployment rate to rise. Key indicators of rising cyclical unemployment can include: reduced GDP growth, increased business closures, and decreased consumer spending.

2. Identifying Economic Conditions that result in Falling Cyclical Unemployment

Cyclical unemployment falls during an economic expansion, as companies hire more workers to meet the growing demand for goods and services. When the economy is growing and consumers are spending more, businesses typically experience increased sales and revenue, which in turn leads to job creation and a decrease in cyclical unemployment rate. Key indicators of falling cyclical unemployment can include: increased GDP growth, reduced business closures, and increased consumer spending.

3. Relationship with other types of Unemployment

It is important to note that cyclical unemployment is only one component of the overall unemployment rate, which also includes structural unemployment (unemployment caused by a mismatch of skills and job opportunities) and frictional unemployment (unemployment resulting from people transitioning between jobs). When considering the overall unemployment rate, it may be necessary to examine these other types of unemployment as well.

4. Conclusion

Cyclical unemployment can be expected to rise during a recession, when economic activity slows down, and businesses cut their workforce to reduce costs. On the other hand, cyclical unemployment tends to fall during an economic expansion, when businesses are experiencing increased sales, and the demand for goods and services is growing, leading to job creation. Understanding the different types of unemployment and their underlying causes can help policymakers and businesses better address unemployment issues through targeted interventions and workforce development programs.

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