Cyclical unemployment is a factor of overall unemployment that relates to the regular ups and downs, or cyclical trends in growth and production, that occur within the business cycle.
Moderating cyclical unemployment during recessions is a major motivation behind the study of economics and the goal of the various policy tools that governments employ to stimulate the economy. Cyclical unemployment is the impact of economic recession or expansion on the total unemployment rate.
When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise. As with all unemployment, when consumer demand for a product or service declines there can be a corresponding reduction in supply production to compensate.
On the other hand, during a recession, the rate of cyclical or involuntary unemployment is high due to the decline in consumer demand for a company’s goods and services. In other words, there is a decrease in production; therefore, fewer workers are needed, resulting in job layoffs.