Cyclical Unemployment
What is cyclical unemployment?
Cyclical unemployment is the portion of joblessness that rises and falls with the business cycle. It increases during economic downturns (recessions) when overall demand for goods and services falls, and declines during expansions when demand and labor needs grow. Cyclical unemployment is one component of total unemployment alongside structural, frictional, seasonal, and institutional factors.
Key takeaways
- Cyclical unemployment moves with the business cycle: up in recessions, down in expansions.
- It occurs because weak demand reduces firms’ need for labor.
- Large recessions can produce substantial cyclical job losses (for example, roughly 1.5 million construction jobs were lost during the 2008 financial crisis).
- Other forms of unemployment can persist even when cyclical unemployment is low.
Key drivers
- Falls in aggregate demand for goods and services reduce firms’ production and labor demand.
- As output (GDP) declines during a downturn, employers cut back on hiring and lay off workers.
- When the economy recovers and demand returns, firms rehire and cyclical unemployment falls.
Example: the 2008 financial crisis
The 2008 housing bust and ensuing Great Recession sharply lowered demand for new construction. As mortgage defaults and foreclosures increased, construction activity plunged and about 1.5 million construction workers lost their jobs. As lending and housing demand recovered over subsequent years, construction employment rebounded, illustrating how cyclical unemployment can reverse with an economic recovery.
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Comparing cyclical unemployment with other types
Cyclical unemployment is one of several distinct types of unemployment:
- Structural unemployment
- Caused by long-term changes in the economy (e.g., technological shifts or industry decline).
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Reflects a mismatch between workers’ skills and job requirements.
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Frictional unemployment
- Short-term unemployment from workers transitioning between jobs or entering the labor force.
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Normal and often viewed as part of a healthy labor market.
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Institutional unemployment
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Results from rules, policies, or market structures (for example, high minimum wages, discriminatory hiring, or strong union contracts) that affect labor market functioning.
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Seasonal unemployment
- Driven by predictable seasonal changes in demand (for example, holiday retail hiring, school calendars, or weather-dependent construction).
- Official statistics are often seasonally adjusted to remove these predictable patterns.
Special considerations
- Multiple types of unemployment can coexist. Except for cyclical unemployment, other types can persist even when the economy is near full employment.
- How the unemployment rate is calculated: (Number of unemployed persons ÷ Labor force) × 100.
- What counts as high: Unemployment rates around 10% are generally considered high; for example, the U.S. rate reached 14.8% during the COVID-19 pandemic.
- Underemployment refers to workers who are involuntarily in part-time or low-skill jobs relative to their skills and desired hours.
Policy responses
Governments and central banks commonly try to reduce cyclical unemployment by boosting aggregate demand:
* Fiscal policy — increased government spending or tax cuts to stimulate demand and hiring.
* Monetary policy — lower interest rates or other measures to encourage borrowing and investment.
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Conclusion
Cyclical unemployment reflects the economy’s short- to medium-term swings in demand. It tends to rise in recessions and fall during recoveries. Understanding its causes and how it differs from structural, frictional, seasonal, and institutional unemployment helps shape effective policy responses aimed at restoring demand and jobs during downturns.