Cyclical Unemployment
Plain definition
Cyclical unemployment is joblessness caused by downturns in the business cycle — when recessions reduce overall demand, firms cut production and lay off workers. It rises in contractions and falls in expansions.
In economics
Cyclical unemployment is the component of unemployment that macroeconomic policy can directly fight: fiscal stimulus and lower interest rates boost demand, encouraging firms to rehire. When cyclical unemployment is zero, the economy is at full employment — actual unemployment equals the natural rate (frictional plus structural). The gap between actual and natural unemployment is called the unemployment gap.
Example
During the Great Recession, U.S. unemployment rose from about 5% to 10% — roughly 5 percentage points of that was cyclical, caused by collapsing demand. As the expansion took hold, cyclical unemployment faded and the rate drifted back toward its natural level of around 4-5%.
Cyclical unemployment is often confused with the total unemployment rate. The headline rate combines all three types; cyclical is only the recession-driven portion above the natural rate. When people say 'the economy is at full employment,' they mean cyclical unemployment is zero — not that unemployment itself is zero.