A:

Cyclical unemployment is always due to a downturn in the business cycle, but it may not be due to a recession. By definition, cyclical unemployment occurs due to the economy suffering a downturn, but an economy in a downturn is not necessarily one in a recession. Although the media often prematurely mentions recession, an economy is in recession only when it has negative growth for two or more quarters in a row.

When an economy contracts, for example, due to a financial crash, such as in 1929 and 2008, demand for goods and services falls. This happens chiefly because consumers’ confidence in the economy has fallen and, accordingly, they hold off on making new purchases. As consumers start buying less, businesses face declining revenues and are forced to reduce costs so that they do not take a loss. Workers are laid off as part of this cost reduction. When demand returns, demand for those workers typically returns as well.

In practice, an economy may contract in one quarter, expand over one or several quarters, and then go through several consecutive quarters of contraction. In this case, the recession technically starts only with the second consecutive quarter of contraction, but negative effects are likely to show well beforehand. The 2008 recession in the United States followed this pattern: In the first quarter of that year, the economy contracted slightly. It expanded slightly in the second quarter, but then contracted for the next four consecutive quarters. In this case, it would not be technically accurate to say that cyclical unemployment in the first quarter of 2008 was due to a recession, but it would be completely correct to say it was due to a downturn.

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