Is the uK Experiencing Cyclical unemployment?

Honor & Scarlett

Cyclical unemployment is unemployment caused by a persistent lack of aggregate demand for goods and services, the national output is less than potential output leading to a negative output gap. The UK is currently experiencing cyclical unemployment, as we are entering a recession due to higher energy prices, the conflict in Ukraine, Brexit, and the effect of inflation for industries reopening after Covid lockdowns. It is evident in everyday life the cost of living has largely impacted many households across the country. The inflation rate is currently at 9.3% with costs such as gas up by 22.7% and accommodation up by 15.5%. As a result of these rapidly rising prices, many households have no choice but to budget, leaving a much smaller amount for their desired goods. Not only does this leave consumers unsatisfied but producers too as their revenue continues to fall uncontrollably as the demand for their products fall. This is exaggerated within the hospitality sector as the lack of need for the service makes it a lesser priority when budgeting.

Firms generate revenue from the sale of goods and services, so when revenue decreases dramatically, firms experience a fall in their profits. This forces firms to reduce labour costs to maintain these profits to keep their business thriving. The UK is expected to enter a recession in 2023 for nearly 2 years, which in turn may cause GDP to decline by up to 2% in 2023 causing less demand for goods and services leading to cyclical unemployment. This is because cyclical unemployment is inversely correlated to GDP growth. Due to this situation, there will be an increase in unemployment, although this is only in the short term as there are large numbers of vacancies in other sectors. For example, the NHS have 133,000 vacancies at the moment. However, it must be taken into account that, there is a time lag when training for a new job, especially within the medical industry, or alternatively many people may be unwilling to switch professions and will choose to stay unemployed.

Cyclical unemployment is temporary and the severity of it depends on the length and size of economic contraction. Therefore, the quicker the UK recovers from the recession, the more confidence consumers will have when purchasing, making more jobs readily available with a higher employment rate. As a result, the government may be able to focus more on public sector spending and less on benefits for those unemployed. The unemployment rate for August to October 2022 increased by 0.1% on the quarter to 3.7%, this is approximately 1.25 million people. In the latest 3-month period, the number of unemployed for up to six months increased across all age groups.

Household real incomes, once inflation is considered, are expected to drop by 7% in the next few years. This will lead to a decline in real consumer spending. Falling Aggregate Demand will cause many firms to scale back recruiting, and many businesses will make redundancies to control their costs. The UK unemployment rate is forecast to climb, reaching 5.5% in 2024, an increase of around 600,000 people.