Structural vs. Cyclical Unemployment: What’s the Difference?

Types of Unemployment: Structural vs. Cyclical

There are two main types of unemployment. Cyclical unemployment refers to when a worker loses their job due to an economic downturn. If unemployment persists for many years due to infrastructural changes to labor markets, it can lead to structural unemployment. Let’s explore the difference between the two.

Understanding General Unemployment

The unemployment rate is the total number of unemployed people represented as a percentage of the workforce. While cyclical unemployment tends to be temporary in nature, the financial effects can be felt for many years. However, structural unemployment is more of a long-term event, which means more extensive measures must be taken to reverse it.

The causes of structural unemployment can include shifts in the economy, improvements in technology, and workers lacking job skills that are required for them to find employment. Conversely, swings in companies’ business cycles and periods of negative economic growth—called recessions—can cause cyclical unemployment. In other words, cyclical unemployment is usually the result of insufficient demand for goods and services.

Structural Unemployment

Unemployment can occur for various reasons, such as an economic downturn or recession. Once the recession is over, the unemployment rate goes back down, eventually to full employment. However, sometimes changes to the structure of an economy can be so significant that it changes the ability of workers to find full-time work.

Following periods of significant economic downturns, such as the Great Recession caused by the 2008 financial crisis, structural unemployment can rise. For example, investments in new technologies that can be used to construct homes can lead to the elimination of construction jobs in the housing market, even after the recession has abated.

There are other types of employment measures that structural unemployment can impact. Frictional unemployment can occur when workers transition from one job to another. However, frictional unemployment is different from structural unemployment in that it is not due to economic changes but instead is voluntary. Total unemployment is a metric that includes structural unemployment and frictional unemployment representing the total number of people unemployed.

Causes of Structural Unemployment

Structural unemployment is a type of long-term unemployment that can last for many years. Structural unemployment can have multiple causes, such as workers not having the skills or training needed to qualify for the current job openings.

For example, major technological advances can occur in industries throughout an economy. Companies need to hire workers who have the technical skills, such as computer programming and mathematical skills, to propel their company forward. Individuals without those skills may become marginalized and experience structural unemployment because there is a mismatch between jobs in the market and their abilities.

The manufacturing sector in the United States has seen enormous technological advances over the past few decades. Production lines that once employed many workers now have computers and automated machines doing those jobs.

Workers who are not skilled in computers and software, which are used to run a production line, are left behind. With advances in artificial intelligence (AI) in recent years, these technological changes are likely to accelerate.

Impact of Structural Unemployment

The changes that drive structural unemployment can lead to tens of thousands of jobs being eliminated. Automation and shipping jobs to countries with low-cost labor are leading causes of structural unemployment in the U.S. As a result, unemployment persists even after a recession has ended and the country returns to stable economic growth.

Structural unemployment can lead to workers falling into poverty or earning less income as they take jobs that pay far less than their previous jobs. An increase in poverty has a detrimental impact on an economy since it leads to less consumer spending and fewer homes being purchased, leading to less tax revenue being collected by state and local governments due to fewer property taxes.

Solutions to Structural Unemployment

Structural unemployment needs long-term solutions that can reverse trends that have existed for many years. Solutions for structural unemployment might include a skills training program in which workers can get retrained for jobs that are in high demand. Training could include online, as well as in-person, training within the private sector.

The federal government can lend a hand too, as in the case of the G.I. Bill. Following World War II, the GI Bill paid stipends for college expenses for veterans of the war so that they could re-acclimate into society by learning new skills to help them find high-paying jobs that were in demand. Low-interest rate mortgage loans were also made available through the GI Bill.

Benefits of Structural Employment

Structural unemployment is often viewed negatively due to its association with job displacement and economic inefficiency. However, it does have certain benefits. Structural unemployment can signal shifts in the economy, such as technological advancements. This prompts businesses to reallocate resources towards more productive sectors, meaning there may be more innovation and long-term growth.

In the long run, structural unemployment encourages labor market flexibility and efficiency by reallocating workers to industries where their skills are in higher demand. This process encourages skill development and specialization, ultimately increasing productivity. This goes hand in hand with the innovation point made in the first paragraph: workers must adapt to innovate markets to not only drive market growth but reduce structural unemployment.

Societies experiencing structural unemployment may develop resilience and adaptive capacity to handle economic disruptions more effectively. This can lead to the emergence of policies and programs aimed at facilitating transitions for displaced workers. In general, companies may actually enhance business practices and future-proof their operation; though this displaces workers, it also creates the potential for future opportunities.

Cyclical Unemployment

Cyclical unemployment is a lack of employment as a result of changes to an economy’s business cycle. Cyclical employment is caused by job losses during downturns or contractions in an economy. A recession, which is when an economy has negative growth for two or more quarters in a row, is not required to cause this type of unemployment.

Understanding Cyclical Unemployment

Cyclical unemployment happens when the demand for goods and services in an economy decreases, forcing companies to lay off workers in an effort to cut costs. Companies generate revenue from the sale of goods and services, and when revenue decreases dramatically, businesses experience a drop in their profits. In an effort to keep the business afloat, companies lay off workers to reduce their labor costs. The aggregate number of workers that have been laid off as a percentage of the working population is the cyclical unemployment rate.

Cyclical unemployment can ebb and flow along with the business cycle, meaning that economic growth, as measured by gross domestic product (GDP), can rise and fall all the time. When GDP growth declines, it typically leads to less demand for goods and services in an economy, which in turn increases cyclical unemployment. As a result, cyclical unemployment is usually inversely correlated to GDP growth, meaning it rises with lower GDP growth and decreases with higher GDP growth.

Cyclical unemployment is a temporary condition, albeit it can last for years if a recession is severe enough. Cyclical unemployment depends on the length and severity of an economic contraction. However, as an economy recovers from a recession, businesses experience an increase in demand for their goods and services, leading to more workers being hired and a decrease in cyclical unemployment.

We can see below, from the interactive unemployment map from the Bureau of Labor Statistics (BLS), that the total unemployment rate can vary from state to state. As of September 2024, the unemployment rate in California and Texas is around 4-5%. Meanwhile, rural states in the northwest such as Montana and Idaho have an unemployment rate of just over 3%. Bear in mind that the graph shows total unemployment, which includes both cyclical and structural unemployment.

How Cyclical Unemployment Is Calculated

The formula for calculating the cyclical unemployment rate is as follows:


$\begin{aligned}&\text{Cyur}=\text{Cur}-(\text{Fur}+\text{Sur})\\&\textbf{where:}\\&\text{Cyur}=\text{Cyclical unemployment rate}\\&\text{Cur}=\text{Current unemployment rate}\\&\text{Fur}=\text{Frictional unemployment rate}\\&\text{Sur}=\text{Structural unemployment rate}\end{aligned}$​Cyur=Cur−(Fur+Sur)where:Cyur=Cyclical unemployment rateCur=Current unemployment rateFur=Frictional unemployment rateSur=Structural unemployment rate​

To calculate the cyclical unemployment rate, subtract the total of the frictional unemployment rate and the structural unemployment rate from the current unemployment rate.

Where:

• The current unemployment rate is the percentage of workers that are unemployed regardless of the reason or type of unemployment.
• Frictional unemployment is the number of workers that are voluntarily moving from one job to another. Frictional unemployment always exists at some level since there is always movement of labor in and out of the workforce and to different jobs.
• As stated earlier, structural unemployment is the long-term damage from changes in an economy that have caused unemployment.

By subtracting the frictional and structural rates from the current unemployment rate, we’re left with only the rate of unemployed as a result of cyclical conditions, such as a change in the business cycle or a recession.

Impact of Cyclical Unemployment

During a recession, the demand for goods and services in an economy falls. As a result of companies earning less revenue, millions of workers can be laid off.  For example, if an auto manufacturer typically sells one million cars per month, they would have adequate production workers employed to meet that demand.

If a recession occurs and demand for cars decreases to 300,000 cars per month, the auto manufacturer would be forced to lay off workers since their monthly sales have dropped by 70%. The laid-off workers would represent an increase in the cyclical unemployment rate.

As the economy begins to recover and consumers and businesses begin spending again, the demand for cars increases. Auto manufacturers begin earning more revenue due to a jump in monthly car sales. As a result, auto manufacturers would add more workers to their production lines to meet the increase in demand for cars leading to a reduction in cyclical unemployment.

The recession that occurred as a result of the coronavirus pandemic led to millions of people being laid off from their jobs. As a result, unemployment rose dramatically to over 14% in the early days of the pandemic in April and May of 2020. As the economy began to recover, the unemployment rate decreased and dropped to just below 7% by the end of 2020.

Although cyclical unemployment is a short-term event when compared to structural unemployment, laid-off workers can be out of work for up to a year or even two years. The damage to a person’s financial situation can be severe.

For example, laid-off workers could have difficulty feeding their families and paying their bills, including their mortgage loan payments. If a borrower falls behind on their mortgage payments for an extended period of time, it could lead to the bank foreclosing on the property, which is when the bank seizes the home.

Even when the economy recovers and individuals get back to work, the damage as a result of cyclical unemployment can be long-lasting. If a borrower has defaulted on their mortgage or other credit products while unemployed, it can be very difficult to obtain credit in the future, which can put them into financial hardship.

Benefits to Cyclical Unemployment

Before we look at some solutions to overcome cyclical unemployment, let’s touch on why it’s not all bad. Cyclical unemployment serves as a crucial indicator of fluctuations in the business cycle, aiding policymakers in understanding the health of the economy and adjusting monetary and fiscal policies. In some ways, cyclical unemployment is a barometer of economic health that is easy to track and devise plans for based on unemployment rates.

During periods of cyclical unemployment, wages may adjust downwards, making labor cheaper for businesses. This can potentially stimulate hiring and investment, contributing to economic stabilization. For example, a small business can pay less to its employee(s) and drive greater company profits.

Increased competition for jobs during cyclical unemployment may help individuals acquire new skills or pursue higher education. Though these folks are unemployed, they may be inspired to develop new skillsets to adapt to more industries in demand. For instance, with the emergency of artificial intelligence, a self-fulfilling prophecy is somewhat created if unemployed citizens decide to develop AI skillsets and further drive development in this space.

Last, cyclical unemployment creates opportunities for businesses to restructure and innovate. Companies that are struggling may be acquired by competitors, meaning industries can experience economies of scale.

Solutions to Cyclical Unemployment

The federal government can expand fiscal stimulus through government spending and lowering taxes. Cutting taxes for consumers and businesses increases the amount of money in the economy, which increases consumer and business spending. Fiscal stimulus can also include a check or direct deposit sent directly to each taxpayer for them to spend in the economy.

The increase in consumption boosts the demand for goods and services, which increases GDP. Higher demand boosts production, resulting in businesses hiring more workers or stemming additional layoffs. As a result, cyclical unemployment decreases as fiscal stimulus injects much-needed cash into a struggling economy.

In addition to fiscal stimulus, monetary stimulus is another method used to reduce cyclical unemployment. In the United States, the Federal Reserve sets interest rate policy. During recessions, the Fed typically cuts interest rates, which leads to lower rates for credit products such as loans.

With lower interest rates, borrowing becomes more attractive and cheaper, leading to an increase in borrowing. The rise in borrowed funds injects more cash into the economy as consumers and businesses spend that money on various uses. 

For example, lower mortgage rates tend to increase the demand for new homes. The increase in home buying, in turn, leads to a boost in construction spending to build new homes to satisfy the demand. As a result, construction workers are hired to satisfy the demand from consumers, which ultimately lowers cyclical unemployment.

Both fiscal and monetary stimulus helps to lower cyclical unemployment through an increase in spending by consumers and businesses. The stimulus also helps prevent companies that might be on the brink of financial collapse from going under.

Key Differences

Cyclical unemployment is the number of people out of work as a result of a temporary setback in the economy, such as a recession or change in a business cycle. On the other hand, structural unemployment is more long-term in nature, and it’s a result of many years of changes occurring that marginalize a group of workers.

Structural unemployment can be caused by technological changes, a lack of skills, or jobs moving overseas to another country. Cyclical unemployment can be reduced through fiscal and monetary stimulus. However, structural unemployment needs more long-term solutions than merely increasing the amount of cash in an economy.

Cyclical unemployment can become structural unemployment when workers remain unemployed so long that when the economy begins to expand, and companies start hiring again, they need to acquire new skills to be competitive. Over time the skills needed to perform certain tasks can change, and when new positions become available, companies may not consider candidates without these new abilities.

Structural Unemployment vs. Cyclical Unemployment Examples

Below are examples of both cyclical and structural unemployment.

Cyclical Unemployment

During the financial crisis of 2008 and the Great Recession that followed, the U.S. economy faced a rapid rise in cyclical unemployment. With millions of people unemployed, some couldn’t pay their mortgage payments, which led to mortgage lenders filing for bankruptcy. Also, the demand for housing plummeted, which led to a decrease in new homes being built. 

As a result, approximately two million workers in the construction industry became unemployed, adding to cyclical unemployment. The Fed responded by cutting interest rates and expanding monetary policy while the U.S. federal government enacted fiscal stimulus measures to jumpstart the economy. 

As the economy eventually recovered, people began to go back to work, which boosted consumer spending and a renewed interest in buying homes again. This led to a return in demand for construction jobs, which ultimately pushed cyclical unemployment lower.

Structural Unemployment

During the same period following the financial crisis and the resulting recession, some workers experienced structural unemployment. Although older workers were less likely to lose their jobs during the 2008 Great Recession, unemployed individuals in their 50s were one-fifth less likely to get rehired than individuals in their 20s or 30s.

Between 2007 and 2010, the unemployment rate for individuals 62 and older increased by 4%, the largest surge during a four-year period in the 35 years prior.

Older workers were more at risk of structural unemployment since they didn’t have the skills to keep themselves competitive in the workforce and are often unwilling to relocate to another part of the country for a new job. As a result, older workers tend to remain unemployed for longer periods during economic downturns since their expertise don’t match the jobs that are in demand. The result was an increase in structural unemployment for their age group.

Other Types of Unemployment

Frictional Unemployment

Frictional unemployment occurs when people voluntarily leave their jobs. As opposed to structural changes to the economy or the natural cycle of markets, frictional unemployment arises because people prioritize other aspects of life, decide to return to school, or decide they need a break from working. This type of unemployment is usually short-term and is much more temporary when compared to structural or cyclical unemployment.

Natural Unemployment

Natural unemployment is the sum of frictional unemployment and structural unemployment. As people always consider what is best for their lives and have skill sets that wax and wane, natural unemployment is simply a consideration of factors specific to people, not necessarily complex financial structures. Natural unemployment is usually the lowest level of unemployment that a healthy economy can sustain without causing inflation.

Institutional Unemployment

Some forms of unemployment may be caused by the government. For example, consider high minimum wage floors. If companies struggle to be able to afford these government regulated floors, they may decide they operate better with fewer open positions. This extracts available jobs from the market not due to skill sets or market cycles but because of enacted government programs. This form of unemployment is called institutional unemployment, and it may be caused by generous social benefit programs, labor market trends, or unionization rates.

Seasonal Unemployment

Whereas structural unemployment may have long-lasting impacts on an economy, seasonal unemployment is among the shortest-lasting. Consider how fluctuations in season can change the available job market. For example, certain positions may only be available during the winter, such as operating a ski resort. These types of jobs that are usually tourist-related or weather-related often have a predefined end date (and a presumed start date in the following year).

Long-Term Unemployment

One type of unemployment that may bridge other forms discussed above is long-term unemployment. The Bureau of Labor Statistics classifies people who have been unemployed for 27 weeks or more and have been actively seeking employment in the past four weeks as long-term unemployed. As this type of unemployment is more likely due to the deterioration of skill sets and financial hardship, it is among the more likely to have the most negative effect on the broad economy.

The Bottom Line

Structural unemployment is when workers experience unemployment for a long period of time as a result of structural changes in an economy and its labor force. Structural unemployment can be caused by massive changes within an industry, such as the manufacturing industry moving jobs overseas.

On the other hand, cyclical unemployment is the result of a recession or economic downturn and is typically more temporary in nature. Policymakers can take steps to decrease cyclical unemployment once an economic downturn has occurred.

However, both cyclical and structural unemployment can impact workers for years to come. If a recession is particularly severe, even workers who lost their job due to cyclical events may face extreme financial hardship such as a loss of home and a permanent change in their financial status.