What typically causes cyclical unemployment?

Cyclical unemployment arises primarily during periods of economic downturns or recessions. This type of unemployment is linked to the fluctuations in the economic cycle, where a decline in consumer demand leads businesses to reduce their output and, consequently, their workforce. During a recession, businesses may experience lower sales, resulting in layoffs and hiring freezes, causing an increase in unemployment rates.

As the economy begins to recover and demand for goods and services increases, businesses are likely to start hiring again, thereby reducing cyclical unemployment. This contrasts with other types of unemployment such as seasonal unemployment, which is tied to specific times of the year, or structural unemployment, which results from changes in the economy that create a mismatch between workers' skills and job requirements. Therefore, the association of cyclical unemployment directly with the overall economic health makes it distinctively linked to downturns and recessions.