Cyclical Unemployment

Summary

This video explains cyclical unemployment, which is closely tied to the business cycle. It discusses how unemployment rises during recessions due to slow economic growth and explains the concept of sticky wages—where wages don’t decrease easily, delaying the recovery of employment. The video also introduces the natural rate of unemployment, which reflects frictional and structural unemployment, and its role in shaping fiscal and monetary policy decisions. Economists argue that policies can address cyclical unemployment but have limited impact on structural or frictional unemployment. The video wraps up with an overview of the business cycle and government intervention.

Takeaways

• 😀 Cyclical unemployment is directly linked to the fluctuations of the business cycle, increasing during recessions when the economy shrinks or grows slowly.
• 😀 Unemployment rises when GDP falls or grows slowly, leading to businesses laying off workers, which directly contributes to higher unemployment.
• 😀 The second reason for rising unemployment during low growth is that idle labor and capital mean the economy can't fully maximize growth.
• 😀 Despite the correlation between unemployment and the business cycle, economists debate the exact reasons for this relationship.
• 😀 Unemployment spikes quickly during a recession, but it returns to normal levels slowly, even when economic growth resumes.
• 😀 Unlike apples, which adjust prices quickly when there's excess supply, the labor market has 'sticky wages' that prevent quick adjustment of wages during downturns.
• 😀 'Sticky wages' occur because people resist wage cuts, fearing personal retaliation or low morale, which slows the process of returning to full employment.
• 😀 Wages tend to rise more frequently than they fall, even in times of economic growth, indicating resistance to downward adjustments in wages.
• 😀 Several factors, such as fear of low-quality jobs, minimum wage laws, and union contracts, slow down the adjustment process for wages, prolonging the period of high unemployment.
• 😀 The natural rate of unemployment refers to the level of unemployment in an economy when there is no cyclical unemployment, including only frictional and structural unemployment.
• 😀 Fiscal and monetary policies can reduce cyclical unemployment, but they are less effective in addressing frictional or structural unemployment, which occur independently of the business cycle.

Q & A

What is cyclical unemployment and how is it related to the business cycle?

Cyclical unemployment refers to the rise in unemployment that occurs during economic recessions or periods of slow growth. It is linked to the business cycle because, during a recession, the economy shrinks or grows slowly, leading to layoffs and increased unemployment.

Why does unemployment tend to remain high even after the economy starts to grow again?

Unemployment remains high after a recession because of 'sticky wages.' Wages tend to decrease slowly even when demand for labor is low, which slows down the process of rehiring workers, causing a delay in the return to normal unemployment levels.

What does the term 'sticky wages' mean and why do wages behave this way?

'Sticky wages' refers to the tendency for wages to be slow to decrease even in times of high unemployment. This happens because workers are resistant to wage cuts, and employers fear reducing wages due to potential negative effects on morale and productivity.

How does sticky wages affect the adjustment process in the labor market?

Sticky wages slow the adjustment process because when wages don't decrease quickly enough, the labor market cannot clear efficiently. This results in prolonged periods of high unemployment, as employers are less willing to hire workers at lower wages.

What role does the fear of wage cuts play in the reluctance to adjust wages?

Workers fear wage cuts because it can negatively affect their morale and motivation. They may even retaliate by working less hard or disrupting the workplace. Employers, understanding this, are reluctant to reduce wages, even during times of economic downturn.

What is the natural rate of unemployment, and why is it important?

The natural rate of unemployment is the level of unemployment that occurs in an economy when there is no cyclical unemployment, i.e., only frictional and structural unemployment. It is important because it represents the baseline level of unemployment that can be expected even in a healthy economy.

How does the natural rate of unemployment relate to fiscal and monetary policy?

When the actual unemployment rate is close to the natural rate, fiscal and monetary policies like government spending or tax cuts have less effect on reducing unemployment, since the economy is already functioning at its natural capacity.

Why does it take so long for the unemployment rate to return to normal levels after a recession?

It takes a long time for the unemployment rate to return to normal levels because of sticky wages, worker reluctance to accept lower-paying jobs, and slow adjustments in the labor market. Even if the economy is growing, wages may not fall quickly enough to clear the labor market.

What are some reasons workers may be reluctant to accept lower-paying jobs during a recession?

Workers may hesitate to take lower-paying jobs because they fear being labeled as 'low-quality' workers. Additionally, workers may prefer to search for a job that better matches their skills, even if it takes a longer time.

How can minimum wages and union contracts affect the adjustment of wages during a recession?

Minimum wages and union contracts can slow wage adjustments because they place legal or contractual limits on how low wages can go, making it harder for employers to lower wages in response to economic conditions.