The business cycle consists of four stages that are expansion, peak, recession, and trough. The expansion stage is characterized by an increase in economic activity, hence, the GDP. This increase in GDP is accompanied by a decline in unemployment. The expansion stage is followed by the peak stage where the economy has reached maximum output while unemployment is low. The recession is characterized by a decline in economic output as well as an increase in unemployment. The recession leads to trough where the economic output is low and the unemployment is at its highest level .
It is not hard to understand why unemployment rate changes throughout the business cycle. When the economy is expanding, the economic activity is high because businesses are producing more goods and services. As a result, they increase their demand for factors of production including labor which helps lower the unemployment rate. The peak stage is where the economic activity is at its highest level in the business cycle. As a result, the unemployment rate is the lowest because businesses need workers to meet the high aggregate demand for goods and services they produce.
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"Unemployment Changes".
The recession occurs when the economic output starts declining. The businesses face declining demand for the goods and services they produce. They respond by slowing the hiring process as well as laying off people in order to cut production costs. Not surprisingly, the recession results in rising unemployment rate. The economic activity is at the lowest level in the business cycle during the trough stage. The businesses face weak demand for their goods and services so they often respond by freezing the hiring process as well as further cutting their work force. Lack of economic activity reduces labor needs for businesses and results in the highest unemployment rate in the business cycle.
- Healy, M. (n.d.). Business Cycles, Unemployment, Inflation. Retrieved June 19, 2018, from http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch9-18.htm
