Definition
Cyclical unemployment is the portion of joblessness that rises and falls with the business cycle. When the economy contracts, total spending drops, firms sell less, and they lay off workers because there is not enough demand to keep everyone employed.
It is distinct from frictional unemployment, the short-term churn of people changing jobs, and from structural unemployment, the mismatch between worker skills and available roles. Cyclical unemployment is the type that disappears once growth resumes and demand recovers.
Why it matters
How it works
A downturn begins with falling demand, perhaps from a shock, a credit crunch, or collapsing confidence. Firms cut production and shed jobs. Newly unemployed workers spend less, which further reduces demand, a feedback loop that can deepen the slump. Because the cause is insufficient spending, the standard remedy is expansionary policy: lower interest rates or increased government spending that revives demand and brings workers back. As recovery takes hold and the economy returns toward its potential output, cyclical unemployment fades.