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What is 'Cyclical Unemployment'

Cyclical unemployment is a factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise.

BREAKING DOWN 'Cyclical Unemployment'

As with all unemployment, when consumer demand for a product or service declines there can be a corresponding reduction in supply production to compensate. As the supply levels are reduced, fewer employees are required to meet the lower standard of production volume. Those workers who are no longer needed will be released by the company, resulting in the aforementioned workers becoming unemployed.

Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work at that point within the business cycle. Most business cycles are repetitive in nature, with the downturn eventually shifting to an upturn again, followed by another downturn.

Example Cause of Cyclical Unemployment

During the financial crisis in 2008, the housing bubble burst. As more borrowers failed to meet the debt obligations associated with their homes, and qualifications for new loans become more stringent, the demand for new construction declined. With the overall number of unemployed climbing and more borrowers were unable to maintain payments on their homes, additional properties were subject to foreclosure, driving demand for construction even lower.

As a result, approximately 2 million workers in the construction field become unemployed.

Classes of Unemployment

Cyclical unemployment is one of three main classes of unemployment as recognized by economists. Other types include structural and frictional. Additional classes exist outside of the main three and can include natural, long-term, real, seasonal and classical unemployment. There is also a category for those considered underemployed.

In most cases, several types of unemployment exist at the same time. With the exception of cyclical unemployment, the other classes can occur even at the peak ranges of business cycles, when the economy is said to be at or near full employment.

Cyclical versus Seasonal

While cyclical unemployment is attributed to the business cycle of an economy, seasonal unemployment occurs as demands shift from one season to the next. This category can include any workers whose jobs are dependent on a particular season. For example, school teachers may be considered seasonal, based on the fact that most schools in the U.S. cease or limit operations during the summer, as well as construction workers living in areas where construction during the winter months is challenging. Certain retail stores hire seasonal workers during the holiday season to better manage increased sales, but release those workers during the post-holiday demand shift.

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