Cyclical Unemployment

When the economy enters a recession, consumers and businesses spend less. Companies respond by cutting production and laying off workers. This increase in unemployment is cyclical, because it is tied to the economic cycle.

For example, during a recession, a car manufacturer might lay off thousands of workers as sales fall. When the economy recovers and car sales pick up, the company rehires workers, and cyclical unemployment falls.

Cyclical unemployment rises sharply during recessions and falls during expansions. It is different from structural unemployment, which is caused by long-term changes in the economy, and frictional unemployment, which reflects the normal time people take to move between jobs.

Governments and central banks try to reduce cyclical unemployment by supporting demand during downturns, using lower interest rates, increased government spending or tax cuts. If a recession is prolonged, cyclical unemployment can turn into structural unemployment, as workers who are out of work for a long time lose skills or become discouraged.