Question

Cyclical unemployment and Structural Unemployment which one is more harmful to a society and its economy? Please explain why do you think so.

Please help!!!

Answer 1

Cyclical unemployment:- unemployment caused due to cyclical forces or business cycle activities in an economy is known as cyclical unemployment. Cyclical unemployment in an economy is basically related with the macro economic situation. During recession and deflation phases of business cycle there is fall in aggregate demand for various goods and services. The fall in the overall demand for the various goods and services leads to decrease in production and increase in cyclical unemployment. In contrary during recovery and inflation phase of business cycle there is increase in aggregate demand for various goods and services, increase in the overall demand for the various goods and services leads to increase in production and decrease in cyclical unemployment.

Structural unemployment is the outcome of structural changes of production activity in the economy, which leads to increase in demand for a specific type of workers or due to technical progress in workplace (development of computer, artificial intelligence, robots). Such change in the economy creates a mismatch of skill required by the employer and the skilled worker available in the economy. Such skill gap creates unemployment in the economy. Because the existing skill and knowledge of the worker is not required by the employer so a worker remains unemployed due to obsolete skill.

Structural unemployment is more harmful to society and economy than Cyclical unemployment

1. The cyclical unemployment is usually for a short period and will be overcome once the business cyclical activity moves upward in an economy. Whereas structural unemployment are for a long period.

2. Workers remains unemployed for a longer period in an economy results in decrease in consumption expenditure (caused due to decrease in income)

3. Decrease in consumption expenditure leads to decrease in aggregate demand, as consumption expenditure is one of the important determinants of aggregate demand in the economy

4. Decrease in aggregate demand in the economy results in decrease in real output and affect growth of the economy.

5. Workers remains unemployed for a longer period will results in decrease in labour participation ratio.

6. Workers remains unemployed for a longer period may become demotivated and discouraged.

7. Increase in unemployment may results in increase in government expenditure and decrease in taxation level as working population is less in economy.