What Is the Relationship between the Business Cycle and Unemployment?

Among economists, there are varying ideas about what drives the business cycle. Characterized by times of growth and periods of contraction, the business cycle causes the level of employment to rise or fall. Such changes in the employment rates are commonly referred to as recessions and expansions. Demographic trends are well-known drivers of change. Shifts in public opinions, as well as legislation, may also impact the business cycle and unemployment, and weather can also be a factor at times.

Historically, population trends are often considered to be one of the major factors driving the business cycle, and these trends directly affect the unemployment rate. Events like the Baby Boom, which led to an unusually large increase in population in Western countries post World War II, may also impact the business cycle and unemployment, since those born during a boom will go on to consume large quantities of items during their lifespans. When disasters happen, or famine or war result in large-scale loss of life, the business cycle may contract due to a reduced capacity to produce food and consumer items. Often, wars subsequently lead to an increase in consumption, because weaponry is produced, and property that was destroyed must be replaced.

Even when demographic changes are not in play, speculative booms and panics may happen due solely to psychological factors. Although economists may not fully understand what creates an economic contagion, its effects are widely known. When a euphoric attitude toward the economy takes hold among the population, many people begin to believe that prices will only go up.

The euphoric mood usually spreads quickly, causing speculators to rush in, thereby driving up prices. Some early investors reap large returns. In a panic, the reverse situation occurs and a crash often results.

Climatological changes can also cause massive shifts in an area's productivity, resulting in economic upheavals. Several years of unusually large or small crop yields may trigger a recession or a boom. All of these things demonstrate the connection between the business cycle and unemployment.

Legislation can also impact the business cycle and unemployment, as politicians attempt to spur business growth. They may also seek to shore up political support by offering incentives or increasing or decreasing taxes in various sectors of the economy. A dramatic shift in the collective mindset of the consumer may also effect the relationship between the business cycle and unemployment.

An overabundance of commodities or times of scarcity may cause the business cycle to expand or contract, resulting in large shifts in employment levels. Related shifts in the public's mood may trigger displacement of large numbers of workers. Conversely, such a shift may leave a business unable to fill available positions.