What Are Unemployment Cycles?

Unemployment cycles move in tandem with general economic activity.

Unemployment for any economy can be a pesky problem. High levels of unemployment mean less economic growth, less consumer spending, lower tax revenue for governments and less revenue for businesses. Byproducts of high unemployment include poverty and crime. Unemployment cycles are the periods of phases of unemployment that include low to high unemployment, which dovetails the expansion, recession and recovery phases of the economic cycles. Ideally, economists stress the need for countries to achieve the natural state of unemployment.

Business Cycles

Business cycles, or economic cycles, are a natural occurrence. The term refers to economy-wide fluctuations from expansion or boom to contraction or recession. As an economy expands, there is an abundance of spending and economic activity as measured by growth in GDP, or gross domestic product, which is the aggregate value of all final goods produced in a country. A recession, as defined by the Natural Bureau of Economic Research (NBER), is a significant decline in widespread economic activity lasting more than a few months to more than one year.

Unemployment Cycles

The unemployment cycle is a reflection of what is going on in the general economy. Low unemployment occurs during an economic boom. This is a period in which the economy is going at full throttle. Business, consumer and government spending are high. Consumers spend because they have jobs and are optimistic about the future. On the flip side, high unemployment occurs in a down economy. This is a period of slow economic growth with very little consumer, business or government spending. Businesses concerned about the general economy cease hiring.

Natural Rate of Unemployment

The concept of the natural rate of unemployment was developed by Milton Friedman and Edmund Phelps in the 1960s. Generally speaking, the natural rate of unemployment occurs even in a healthy economy and is the point where every willing and able person of working age is either working or seeking a job and ready to work. According to the concept of the natural rate of unemployment, the unemployment rate can never be zero because this would overheat the economy. Even so, wages would likely rise before there is no unemployment. The natural rate of unemployment is a moving target, but in general, economists often say that the natural rate of unemployment is less than 4 percent.

Stimulating the Economy

When there is high unemployment, governments take action to spur economic growth. For example, a government will increase its spending to give a boost to the economy. Unemployment insurance, which was written into law as part of the New Deal by President Roosevelt, is a form of government spending that aids unemployed workers by providing them with unemployment benefits. The Federal Reserve, which is the central bank of the United States responsible for monetary policy, may ease lending requirements, making it easier for banks to lend money to consumers, businesses and government.

References

• The National Bureau of Economic Research: The NBER's Business Cycle Dating Committee
• The National Bureau of Economic Research: The NBER's Business Cycle Dating Procedure: Frequently Asked Questions
• Economics Help: The Natural Rate of Unemployment
• "Huffington Post"; Blame Business Cycle for High Unemployment, SF Fed Says; Ann Saphir; March 2011