Cyclical Unemployment

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.

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