Question

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

Short answer

Cyclical unemployment is expected to rise during the contraction phase of a business cycle, as demand for goods and services decreases, leading to job losses. On the other hand, it is expected to fall during the expansion phase, as demand for goods and services increases, leading to job creation.

Step-by-step solution

Understanding Business Cycles

To understand when cyclical unemployment rises or falls, we need to be familiar with the phases of a business cycle. A business cycle consists of four phases: 1. Expansion - a period of rising economic activity, characterized by increasing demand, output, and employment. 2. Peak - the highest point of economic activity in a business cycle. 3. Contraction - a period of declining economic activity, characterized by decreasing demand, output, and employment. 4. Trough - the lowest point of economic activity in a business cycle. Now, we will identify when cyclical unemployment would be expected to rise and fall within these phases.

Cyclical Unemployment Rising

Cyclical unemployment is expected to rise during the contraction phase of a business cycle. During this phase, the demand for goods and services decreases, causing businesses to reduce production and, in turn, to lay off workers. As a result, the unemployment rate begins to increase, corresponding to a rise in cyclical unemployment.

Cyclical Unemployment Falling

Cyclical unemployment is expected to fall during the expansion phase of a business cycle. In this phase, there is increased demand for goods and services, leading businesses to expand, invest in capital, and hire more workers to meet the growing consumer demand. Consequently, the unemployment rate starts to decline, indicating a reduction in cyclical unemployment. To summarize, cyclical unemployment rises during the contraction phase of a business cycle and falls during the expansion phase. Understanding the connection between cyclical unemployment and business cycles can help policymakers implement appropriate measures to mitigate the negative effects of unemployment during economic downturns and promote economic recovery.