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Cyclical Unemployment
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Cyclical Unemployment

Introduction to Cyclical Unemployment

In this section, the concept of cyclical unemployment and its correlation with the business cycle is introduced. The relationship between unemployment and economic growth during recessions is discussed.

Understanding Cyclical Unemployment

  • During a recession, when the economy is shrinking or growing slowly, unemployment increases.
  • Two reasons contribute to high unemployment during low growth periods:
  • Firms lay off workers when GDP falls or grows slower than expected.
  • Idle labor and capital result from high unemployment, hindering economic growth.

Debating the Reasons for Cyclical Unemployment

  • Economists debate the exact reasons behind cyclical unemployment.
  • Unemployment typically spikes quickly during a decline in growth but takes longer to return to normal levels.
  • The delayed recovery of unemployment after a recession raises questions about how labor markets behave compared to other markets.

Sticky Wages and Adjustment Process

  • Wages tend to fall more slowly than expected even when there are many unemployed workers.
  • Sticky wages reduce incentives for hiring more workers and slow down the adjustment process.
  • Fear of reducing morale leads employers to be reluctant in reducing nominal wages.

Factors Contributing to Sticky Wages

  • Human beings react negatively when their wages fall, especially if it's caused by an easily identifiable person like an employer.
  • Sticky wages can be attributed to various factors such as fear of retaliation, reduced morale, and concerns about being labeled as low-quality workers.
  • Minimum wages and union contracts also limit how low wages can go, further slowing down wage adjustments.

Factors Affecting Unemployment Duration

This section explores additional factors that contribute to the duration of unemployment, including job search time, minimum wages, union contracts, and the concept of the natural rate of unemployment.

Prolonged Job Search and Wage Adjustments

  • Workers may take a long time to search for a new job before accepting one.
  • Minimum wages and union contracts can further slow down wage adjustments by imposing legal or contractual limits on wage reductions.

The Natural Rate of Unemployment

  • The natural rate of unemployment is defined as the rate that would occur if there were no cyclical unemployment.
  • It represents frictional plus structural unemployment.
  • The natural rate is important because it helps determine the effectiveness of fiscal and monetary policies in reducing cyclical unemployment.

Conclusion and Future Topics

This section concludes the discussion on cyclical unemployment and highlights its connection to theories about business cycles. It also mentions future videos that will delve into related topics.

Connection to Business Cycles and Policy Implications

  • Theories of cyclical unemployment are closely tied to theories about business cycles.
  • Fiscal and monetary policies can potentially reduce cyclical unemployment but have limited impact on frictional or structural unemployment.
  • When the actual unemployment rate approaches the natural rate, policy interventions become less effective.

Estimating the Natural Rate of Unemployment

  • The natural rate of unemployment cannot be directly observed but can only be estimated using various methods.
  • Different estimates may suggest different levels of room for policy interventions.

Future Videos

Playlists: Economics [Intermediate] Pt.1 Principles of Economics: Macroeconomics Unit 6: Unemployment and Labor Force Participation
Video description

This wk: More from Macro -- Cyclical unemployment, sticky wages, natural unemployment, and more. Coming soon: Who works? Who doesn’t? Why? Get a big picture view on labor force participation. Unemployment rates ebb and flow with business cycle phases. We all saw this when unemployment rates increased in the United States during the 2008 recession. What we observed was called cyclical unemployment, and it usually accompanies slow economic growth. It can take many years for unemployment rates to return to pre-recession levels, even after real GDP per capita growth has bounced back. Why is that? For starters, supply and demand in labor markets have to deal with “sticky” wages. That is, wages that adjust more slowly, which in turn reduces an employer’s incentive to hire. Why are wages sticky to begin with? Economists have many theories, but one that is fairly obvious is that employers are reluctant to lower wages out of fear that their employees may respond by working less or even causing disruptions in the workplace. Employers don’t want to risk a dip in morale. In short, wages take longer to adjust to changes in the labor market than goods may take to adjust to a change in price. Other factors affecting wage adjustment could include minimum wages or union contracts, which put contractual limits on how low wages can go. Both of these factors affect the rate at which unemployed workers are rehired. Another contributing factor to prolonged cyclical unemployment is that people are reluctant to take lower-wage, lower-skill jobs than they previously held. For example, an unemployed computer programmer may not want to accept a job as a barista, and will search for a long time to find a job that is more in line with their previous work. As we’ve learned from this video, cyclical unemployment responds to booms and busts. But what causes these business cycle fluctuations? We’ll be covering that topic in future videos. Subscribe for new videos: http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Next video: http://bit.ly/2eTze7Z