Young woman on the phone and reading a newspaper.

Cyclical Unemployment: What You Need To Know

Cathie Ericson9-minute read
December 16, 2021

“Unemployment” is a scary word. Most of us depend on our jobs to pay for all the things we need and want – and having a job is crucial when you’re cleaning up your financial life or applying for credit, such as a mortgage.

But the economy moves in a cycle, which means that sometimes unemployment affects a large part of the labor force at once. These cycles, when unemployment rises and falls, are dictated by forces such as supply and demand and can slow economic activity.

Didn’t pay attention in your high school economics class? That’s OK. We have you covered – supply and demand refers to how goods are consumed by people. Supply is how much of something there is, and demand is how much of that good people wants. Obviously if there is a large supply and fewer people wanting or “demanding” the item (or, in the case of cyclical unemployment, being able to pay for it) then prices can fall, and as part of that, jobs go away and the unemployment rate goes up.

Let’s look a little deeper at this factor of economic growth and how it might be affecting you.

Cyclical Unemployment, Defined

In a nutshell, cyclical unemployment occurs when economic demand is too low to support peak employment. This happens during slow economic growth and other periods of economic contraction.

With fewer people requesting goods and services, companies need fewer people to produce them, sell them and service them. That means they might need to reduce their workforce, which can cause economic growth to slide as the labor market shrinks.

Why Cyclical Unemployment Occurs

The forces of supply and demand can be a little complex, but basically when it becomes harder to supply all the things customers need, they cost more to produce. And that can cause a rise in the price consumers pay. As prices go up, demand for the items can decrease because people either can’t or don’t want to pay the higher price.

As demand dampens, businesses might have lower profits and that can lead them to make hard choices about their workforce. They may begin shedding employees, which further reduces market demand – as those people then have less to spend – and can build into a recession.

Cyclical unemployment due to these market forces usually takes a while to build, and the effects might not be felt right away. However, there are other conditions that can force an economic contraction, and we need not look far to find a cyclical unemployment example for the ages. In March 2020, the economy was trucking along like nothing else and then, when COVID-19 hit, there were mass shutdowns as people obeyed shelter-in-place orders for their health and safety.

As nonessential businesses shut down, a huge swath of the country was out of work. This shock to the economic system from a smaller labor market is likely to have long-lasting repercussions, the details of which aren’t even known yet.

How To Protect Yourself From Cyclical Unemployment

You might be thinking that there’s an easy answer to avoiding cyclical unemployment, which is to be very good at your job. Of course, that can help, but it many situations, there’s no way to protect yourself from layoffs as often they have very little to do with job performance.

The brutal effects of the recent shutdown on the hospitality industry is one such example. No one could have predicted that virtually every restaurant would shut down simultaneously. In normal times, if you were a fantastic server, for example, and your restaurant closed for some reason, you’d be very likely to get another job down the street. Of course, that was not the case in this situation.

Job layoffs can also be disproportionately hard on younger employees, who tend to lose their less-essential positions in a recession at a higher rate. And of course, if you had recently changed jobs or careers, you wouldn’t have the same track record as a more seasoned employee and be more likely subject to a layoff.

However, while the ability to avoid a job layoff is not entirely under your control, there are some planning tips and best practices that can help.

Pay Attention

While an abrupt shutdown such as we just experienced is very rare, there are often subtle signs that your position might be at risk. That’s why it’s important to stay current on the news concerning macroeconomic conditions generally and your employer’s business in particular. You want to know which divisions are generating higher revenues, and position yourself to make a move, if at all possible.

For example, a technology company might sell its software support to a wide variety of industries. If you’ve been following the news, you would know that certain sectors of the labor market are more likely than others to be making technology investments.

So if your company was organized by vertical industry, you might look for a transfer to the team that services healthcare companies, rather than agricultural, which has been affected negatively by trade wars, or the hospitality businesses that saw outlets shuttered during COVID-19.

Never Stop Learning

Gone are the days when an employee would start at one company and steadily work their way up. Today’s career path rarely goes in a straight line and with the ongoing advances and disruption in the business world, most employees find themselves needing to upskill or reskill in order to stay relevant.

That’s why it’s important to take control of your own learning rather than relying on your employer. If you’re reading online employment ads, note different skills or certificates that prospective employers mention as being important and then figure out if and how you can learn those skills – whether it’s through an online course or by earning community college credits. Many learning companies offer a wide variety of resources for free through online courses in a specific area or you can search out “Massive Open Online Courses” (MOOCs) which are taught by noted colleges.

While everyone should regularly brush up their skills, of course it’s even more important for un- or under-employed people to avail themselves of whatever job skill upgrades are available to them. If you have recently been unemployed, make sure to check your benefits to see if your former employer offers “outplacement” services, which often include an education component.

Develop Diverse Income Sources

Another way to protect yourself is by having income sources in addition to your regular job. Many people turn to “passive income,” such as collecting a monthly rent check from an investment property or receiving a percentage of revenue from hosting ads on your blog. Remember that while “passive” income sounds like a great way to make money, it’s often not “passive” to set up, typically requiring a decent investment of time or money to get started. But if you’re unemployed, you might have that extra time that can allow you to thoroughly research and set up a passive income stream. It will keep you busy now and allow you to earn income even when you return to a job.

Another popular strategy is developing side hustles where you earn additional income, often doing something you love. For example, you might tutor kids or teach piano in the evenings, help party givers plan their events or put in a vegetable garden for someone with a brown thumb. And of course, there are numerous apps that will pair you with people needing your services, from food delivery to dog-walking to ride-hailing.

Getting going on one of these options can be a great way to bridge the gap and continue to provide income even if your main source vanishes, but also can be something to return to when you want an infusion of cash for a big-ticket item, like a down payment for a house or a vacation. Many people also direct these funds to their emergency savings accounts.

Other Types Of Unemployment

While we’ve explained cyclical unemployment, there are other types of unemployment. Here’s a brief overview to help you understand that unemployment can happen for many reasons.

Structural Unemployment

Structural unemployment refers to workers losing their jobs because of long-term shifts in the economy and the types of workers whose skills are needed. For example, when manufacturing slowed, those who specialized in working on an assembly line or in a fabrication shop found themselves out of jobs unless they were able to reskill.

One of the key reasons for structural unemployment is due to technological advances. Today, as companies turn to artificial intelligence for many rote tasks, there will be a variety of workers who lose their jobs, from call center employees to administrative assistants. It highlights the need for workers to constantly be looking to upgrade their skills to stay relevant.

Frictional Unemployment

Frictional unemployment is a natural type of unemployment that occurs when there is a mismatch of jobs and employees. Examples include new graduates seeking a starting position or an existing employee who wants a better job by choice. The faster that prospective employees are matched with potential jobs, the faster frictional unemployment dissipates. And that’s easier than ever today, thanks to social media and online job boards where workers can spread the word and quickly assess available opportunities.

When the economy is suffering from cyclical unemployment, frictional unemployment tends to go down. That’s because workers who are fortunate to have jobs aren’t eager to leave them.

Institutional Unemployment

This type of unemployment comes from long-term or permanent economic factors that affect the labor market. That might include government incentives like a higher minimum wage or heftier unemployment checks. It also might result from policies like laws that require additional licensing or a move to unionize.

In other words, institutional unemployment is caused by outside factors, rather than individual choice.

Seasonal Unemployment

Think ski resorts in the summer and al fresco restaurants in the winter. Seasonal employment can be due to conditions such as demand for a particular activity waning, or can depend on travelers visiting a destination during vacation season. While most vacation-related businesses staff up according to their busy season, many have figured out ways to keep demand high by pivoting their business model to appeal to consumers year-round, which can reduce seasonal unemployment to a degree.

For example, a sporting goods shop might rent skis in the winter and bikes in the summer, or a ski resort might expand its marketing to promote summer hiking or an all-terrain bike park.

Cyclical Unemployment FAQs

How Does Cyclical Unemployment End?

The good thing about a business cycle (especially an unpleasant one) is that it has an end, and eventually the economy will stabilize and then begin growing again. This opposite end of the cycle occurs when businesses begin hiring new employees as demand for goods increases. Those employees then have money they can in turn spend on goods and services, and the cycle begins anew.

The problem is that it’s impossible to predict how long unemployment might last. It can go on for short or long periods of time, depending on the problems that caused it and how smoothly the general economy emerges.

With the cyclical unemployment caused by COVID-19, for example, economists were initially hoping for a “V”-shaped recovery, which would mean that the economy would freefall, bottom out, and then shoot back up, just like the letter indicates. As current conditions persist, that looks more unlikely, although markets can be fickle beasts and we can still hope for the best.

Can The Government Do Anything About Cyclical Unemployment?

If there’s someone who cares about your finances almost as much as you, it’s the U.S. government. After all, tax revenue and general goodwill and citizen happiness depend on people being employed and productive – and able to buy the things they and their families need.

There are a number of “levers” that the government can rely on as part of a monetary policy strategy to combat cyclical unemployment. An important one that the Federal Reserve spearheads involves interest rates. The board will raise interest rates to prevent inflation when the economy is beginning to overheat and lower them to encourage new investment and increased economic activity.

In fact, currently interest rates are at historical lows, which is helping people better manage their monthly bills if they’re able to refinance or buy a house with a smaller monthly payment.

All Economies Experience Cyclical Unemployment

If you’ve suffered cyclical unemployment, there’s no question it can feel devastating. But it can help to know that often it has nothing to do with you – and everything to do with current monetary policy and economic conditions.

However, that’s cold comfort when you want and need a job. That’s why it’s important to do everything you can while you’re employed to prepare for this “rainy day.” That might include pivoting your career to a more in-demand function or industry, exploring passive income or side hustles, and making sure to keep your financial house in order. You might take steps to build up an emergency fund and plan a budget that allows you to temporarily slash spending in certain areas when needed.

In fact, learning more about your personal finances and how you can shore them up is good advice in any economy. The more you’re able to take proactive steps, the more likely you are to feel in control, even if the rest of the world seems out of control.

Financial Fitness

Get your finances in tip top shape with budgeting tips and more!

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.