Is cyclical unemployment starting to rise in the UK economy?

Students need to have a clear understanding of the different types and causes of unemployment. Cyclical (or demand-deficient) unemployment is one of them. In this short revision video, we look at how to model cyclical unemployment using an AD-AS diagram and then look at some data which suggests the UK labour market is weakening as 2022 comes to a close.

Cyclical unemployment is involuntary unemployment due to a lack of aggregate demand for goods and services. This is also known as Keynesian unemployment or demand-deficient unemployment.

Is cyclical unemployment likely to rise in the UK in 2023?

• The UK economy is expected to experience a long, shallow recession that might last two years – real GDP is forecast to drop 2% in 2023.
• Household real incomes - once rising prices are considered – are expected to drop by 7% in the next few years.
• This will lead to a decline in real consumer spending
• Falling AD will cause many firms to scale back job hiring, and many businesses will make redundancies to control their costs
• The UK unemployment rate is forecast to climb - perhaps reaching 5.5% in 2024, an increase of around 600,000 people.