"most US business cycles are a pretty simple phenomenon. Because of excessively tight money, NGDP growth slows relative to what was expected when labor contracts were signed. Because hourly nominal wage growth is very slow to adjust, a sharp slowdown in NGDP growth raises the ratio of W/NGDP, which leads to fewer hours worked and less output. It may take many years for the labor market to fully adjust. (Note: if NGDP had started growing again at 5% in mid-2009, we’d be mostly out of the recession by now. The recovery was slowed by further unexpected (negative) NGDP growth shocks after 2009.)
Think of recessions in terms of the game of musical chairs. When the music stops several chairs are removed, and a few participants in the game end up sitting on the floor. Slow NGDP growth combined with sticky wages is like taking away a few chairs; several unemployed workers end up “sitting on the floor” (i.e. unemployed), as there is not enough aggregate nominal income to support full employment at the existing nominal hourly wage level.
Other variables such as interest rates also move around over the business cycle, but don’t really play a causal role in unemployment. It’s all about NGDP and hourly wage growth."
