LONG-RUN TOTAL COST: The opportunity cost incurred by all of the factors of production used in the long run (when all inputs are variable) by a firm to produce of a good or service, including wages paid to labor, rent paid for the land, interest paid to capital owners, and a normal profit paid to entrepreneurs. Unlike short-run total cost, long-run total cost can not be separated into fixed cost and variable cost. In the long run, all inputs are variable, so all cost is variable.
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Unemployment attributable to a general decline in macroeconomic activity, especially expenditures on gross domestic product, that occurs during a business-cycle contraction. When the economy dips into a contraction, or recession, aggregate demand declines, so less output is produced and fewer workers and other resources are employed. Hence unemployment of the cyclical variety increases. Cyclical unemployment is one of four unemployment sources. The other three are seasonal unemployment, frictional unemployment, and structural unemployment. The key with cyclical unemployment is that aggregate demand dips below that needed to purchase full-employment output. Cyclical unemployment results when the household, business, government, and foreign sectors buy fewer goods and services during a recession. This means producers sell fewer goods and services, which then means fewer workers are employed in the production of goods and services. Some workers are then temporarily unemployed, presumably to be re-employed during the ensuing business-cycle expansion.
To see cyclical unemployment in action, consider the plight of Traci Tapani, a loyal employee of the Mona Mallard Duct Tape Manufacturing Company. Traci has spent eight hours a day for the last three months inserting circular wax paper separaters between rolls of duct tape that are then boxed and shipped from the factory. Traci enjoys her job so much she rarely calls in sick and has never stolen company property. She is a model worker.
Unfortunately, when a business-cycle contraction causes a serious drop in the demand for duct tape produced at the Mona Mallard factory, Mona Mallard is forced to reduce production and lay off a few workers. As a relatively recent hire, Traci is at the top of the lay-off list. So Traci becomes unemployed. But not because she is a bad worker or bad person. She has been merely caught in the tug and pull of business-cycle instability.
If all goes well, Traci is likely to get her job back when the economy recovers and Mona Mallard's sales increase. This could be a few weeks or a few months. Of course, she could seek more immediate employment selling tacos at Waldo's TexMex Taco World or fabricating Stuffed Amigos for The Wacky Willy Company.
Unfortunately, these employers, like many other Shady Valley employers, have been hit by the recession, as well. Not only are they NOT hiring new employees, they have added a few of their own workers to the ranks of the cyclically unemployed. In the mean time, Traci can collect unemployment compensation, welfare checks, or perhaps even move in with her parents.
The BadCyclical unemployment is generally a phenomenon that society would rather avoid. The primary reason is that members of society suffer when a business-cycle contraction causes their unemployment.
- Financial Hardships: The primary problem with cyclical unemployment is the personal financial hardships inflicted on the unemployed workers. Even with income provided by unemployment compensation, welfare, and other transfer payments, cyclically unemployed workers cannot purchase as many goods and services and thus experience a drop in living standards.
Even with government or family assistance, Traci is bound to make sacrifices. Her savings account ($132.14) will be quickly depleted. She probably will have her car repossessed after failing to make loan payments. And she will have to reduce extravagant expenditures on things like more than one meal a day.
- Poorest of the Poor: Moreover, cyclically unemployed workers tend to be folks spending most of their existence on the low end of the income spectrum. They tend to be the last hired and first fired, frequently working at minimum wages. Very few have extensive savings or other financial resources to draw upon that can tide them through until the next expansion. Traci was a recent hire at the Mona Mallard factory, lacking the seniority that kept other workers employed.
- Social Problems: In addition to the monetary hardships, cyclically unemployed workers also encounter social and psychological hardships. Many people derive a sense of "self worth" from their jobs. Workers like it when an employer "values" them enough to give them a paycheck. Unemployed workers lose this self-esteem when unemployed. This, by the way, is a likely reason why suicides tend to increase during business-cycle contractions. Traci's predicament could become so bad that she considers suicide or turns to a life of drugs and prostitution.
The GoodWhile the prevailing view is that cyclical unemployment is bad, it is not necessarily all bad. Efficiency is often enhanced with cyclical unemployment.
- Efficient Firm Production: Workers most likely to be cyclically unemployed tend to be the least productive workers. Firms hit by a drop in sales during a recession, often use this as an opportunity to "clean house," so to speak, laying off their least productive workers. This improves their productivity when the next expansion begins. For the economy as a whole cyclically unemployment helps enhance efficiency.
Traci Tapani is a good person, but she just is not really cut out to work in a duct tape factory. When employed, her productivity was the lowest of all Mona Mallard employees. Without Traci, the Mona Mallard Duct Tape Company is actually more efficient.
- Efficient Resource Allocation: Moreover, being cyclically unemployed gives workers opportunities and incentives to reallocate their productive activities. Workers locked into their jobs, complete with health insurance, retirement plans, and other fringe benefits, are less inclined to switch careers, start their own businesses, or return to school. But when unemployed, they have fewer reasons NOT to take chances. As such they have the opportunity to become more productive.
Traci never actually wanted to spend her life packing rolls of duct tape into big boxes. Here lifelong dream was always to repair alarm clocks. Now that she is no longer trapped in the Mona Mallard factory, she has the opportunity to take a few courses at the local community college on alarm clock repair. Maybe she will set up a little shop near the Shady Valley Shopping Mall or start an Internet-based alarm clock repair business. Being unemployed, she has little to lose.
And The PoliciesUnlike seasonal unemployment, which is an inherent part of some jobs, and frictional and structural unemployment, which are an inherent part of a complex, healthy, prospering economy, cyclical unemployment is something society would rather avoid and can avoid by stabilizing business-cycle fluctuations. Reducing or eliminating cyclical unemployment is a major policy goal of macroeconomics.
In recent decades the two most popular avenues to neutralizing cyclical unemployment have been expansionary fiscal policy and expansionary monetary policy. Both are designed to avoid or correct business-cycle contractions by stimulating aggregate demand and thus eliminating or reducing cyclical unemployment.
- Expansionary fiscal policy works by decreasing taxes or increasing government spending (especially government purchases of goods and services). This is largely the approach taken during the depths of the 1930s Great Depression and has been used repeatedly since.
- Expansionary monetary policy works by increasing the amount of money in circulation and reducing interest rates. This has been a relatively popular policy approach in more recent decades.
CYCLICAL UNEMPLOYMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 27, 2024].
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