← Macro-economic influences on the New Zealand economy

Unemployment types & the business cycle

The recessionary gap and unemployment types are tested every year, but usually inside a longer question rather than owning one outright — easy to under-revise for that reason.

The four types of unemployment

  • Frictional: between jobs, searching for a better match — short-term, always present even in a healthy economy.
  • Structural: a mismatch between workers' skills and available jobs — caused by automation, technology change, or a declining industry. Fixed by retraining (a supply-side response), not AD stimulus.
  • Cyclical: caused by weak aggregate demand in a downturn — rises and falls with the business cycle. Fixed by expansionary demand-side policy.
  • Seasonal: follows a predictable pattern tied to the time of year (tourism, agriculture, retail over summer/Christmas).
Exam-style Classify the unemployment A ski-field worker is laid off at the end of winter. A factory worker is laid off when a robotic arm replaces their role. Classify each. Ski-field worker: the job disappears on a predictable yearly pattern (winter → summer) — SEASONAL. Factory worker: the job disappears permanently because a machine does it now, and the worker's old skills no longer match available roles — STRUCTURAL. Neither is CYCLICAL, because neither is described as being caused by a general downturn in demand across the economy. ✓ Ski-field worker: seasonal. Factory worker: structural.

The business cycle (Model Two)

  • Plots real GDP % CHANGE (the growth rate) against time — NOT the level of GDP.
  • ZERO is the key reference line: above zero, the economy is growing; below zero, it is shrinking.
  • A recession is defined as TWO CONSECUTIVE QUARTERS of negative real GDP growth.
  • Per-capita matters: if population grows faster than real GDP, real GDP PER PERSON can fall even while total real GDP is still positive.
Real paper — 2024 Marking a position on the business cycle New Zealand's economic activity declined for three of the last four quarters, and fell on a per-capita basis for all four. Mark New Zealand's position on the business cycle model (Real GDP % change vs time) and explain your choice. Three of four quarters with declining activity, including at least two CONSECUTIVE quarters, satisfies the technical definition of a recession. On the graph, this is a point plotted BELOW ZERO on the real GDP % change axis. The per-capita result strengthens the case: living standards per person were falling for the whole period, even in quarters where total real GDP itself may have been closer to flat. ✓ Plot the position below the zero line, in the recession phase, and justify it with the "two consecutive quarters of negative growth" definition plus the per-capita evidence.

Practise just this