Cyclical Unemployment
Unemployment caused by a decline in economic activity during a recession or downturn.
What is Cyclical Unemployment?
Cyclical unemployment is unemployment that rises and falls with the business cycle — it is directly caused by insufficient aggregate demand in the economy. During recessions, businesses reduce output and lay off workers because consumer and business spending falls. As the economy recovers and demand picks up, businesses rehire and cyclical unemployment declines. It is the main type of unemployment that monetary and fiscal policy can address: interest rate cuts and fiscal stimulus aim to boost demand, which in turn reduces cyclical unemployment. Cyclical unemployment is measured as the difference between the actual unemployment rate and the natural rate of unemployment.
Example
During the 2008–2009 US recession, unemployment rose from 4.7% in November 2007 to 10.0% in October 2009 — an increase of over 5 percentage points. Most of this increase was cyclical: factories cut production, construction stopped, and retailers laid off workers in response to collapsing demand. As the recovery progressed, cyclical unemployment gradually fell back toward the natural rate.
Source: Bureau of Labor Statistics — Unemployment Rate History