Cyclical unemployment arises due to changes in the business cycle; it occurs when the gross domestic product (GDP) falls and the economy enters a phase of contraction. Workers who lose their jobs due to a business cycle downturn can expect to get hired back once the downturn is over. On the other hand, seasonal unemployment occurs in regular patterns, usually on an annual basis, and is caused by predictable changes in demand. For example, lifeguards who are out of work at the end of summer are experiencing seasonal unemployment.

Cyclical unemployment is caused by the lack of demand that is a consequence of business cycle downturns. Businesses facing lower demand have lower revenues and usually have to reduce their costs to prevent taking losses; frequently, this is done by laying off workers. When the economy begins to expand and demand returns to former levels, employers need those workers again. For example, construction workers who lost their jobs in the wake of the 2008 financial crisis and the associated fall in housing demand experienced cyclical unemployment; when housing demand returns to its former levels, demand for those workers will also return.

Unlike cyclical unemployment, seasonal unemployment occurs on a more or less fixed and predictable basis, as it is caused by shifts in demand that depend on the time of year. Seasonal unemployment is actually a type of structural unemployment, as the structure of the economy changes on a seasonal basis and demand for workers changes accordingly. For example, in November and December, there is a surge in demand for holiday ornaments and holiday-related products, and in July and August there is a surge in demand for vacations. The demand for these goods and services creates demand for workers who can supply them.