Question

difference between the terms cyclical and seasonal unemployment. Does natural rate of unemployment include cyclical unemployment ? why?

(need 500-600 words with figure if possible)

Answer 1

Cyclical Unemployment

Cyclical unemployment because it goes in cycles. Cyclical unemployment occurs because of these cycles. When the economy enters a recession, many of the jobs lost are considered cyclical unemployment.

• It is the unemployment caused by the upswings and downswings of business cycles in the economy.
• During an upswing (expansionary phase of a business cycle) unemployment goes down.
• During a downswing (contractionary phase of a business cycle) unemployment goes up.
• This kind of unemployment, which fluctuates with business cycles is called cyclical unemployment.

Examples:

• Rita lost her job as an architect during the recession as businesses cut back on their spending ( job loss due to contraction or recession in the business cycle).
• Another example of cyclical unemployment was the large layoffs created in construction, real estate, and mortgage around 2007.

Structural Unemployment

It is unemployment due to lack of skills demanded by the market place.Structural unemployment is the worst kind of unemployment to get rid of. This kind of unemployment is mostly seen when the economy is surging in terms of rapid technological changes.

• Structural unemployment is long-lasting unemployment that comes about due to shifts in an economy.
• This type of unemployment happens because though jobs are available, there’s a mismatch between what companies need and what available workers offer.
• Structural unemployment can last for decades and usually requires a radical change to reverse.
• Technology tends to exacerbate structural unemployment, marginalizing certain workers and rendering particural jobs like manufacturing to become absolute.

Example:

• Warren lost his job as a cashier due to the creation and use of self check out counters due to job skills mismatch or replaced by technology.
• Due to growing demand of data scientists and Artificial Intelligence people in the field of Reporting and Analysis will become unemployed if they do not learn advance skills like R, Python, SQL etc.

Natural Rate of Unemployment

The natural rate of unemployment is the unemployment rate that would exist in a growing and healthy economy. In other words, the natural rate of unemployment includes only frictional and structural unemployment, and not cyclical unemployment.

Frictional Unemployment is inevitable as there will always be people in economy that will be shifting from one job to another. Structural unemployment will also exist as due to continuous improvement of technology old skills will become obselete and business organisations will demand new upgraded skills. However Structural Unemployment is a serious matter of concern for the government.

It does not include Cyclical Unemployment. The natural rate of unemployment is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural rate. When the economy is at full employment, real GDP is equal to potential real GDP.

The natural rate of unemployment is unemployment that does not go away on its own even in the long run.It is the amount of unemployment that the economy normally experiences.This is what the economist goals are for a booming society with full employment. There is no unemployment due to a bad economy.

There is frictional unemployment and this is good because otherwise the economy will become stagnent and people would be unable to switch jobs if they are unhappy.In the US this is 5% - 6.5%. Employment that is too low is bad for the economy and causes people to be over worked and employers to have to raise wages making products more expensive due to Inflation.

To conclude we can say that natural rate of unemployment is the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time; the sum of frictional plus structural unemployment.