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Cyclical Unemployment

Definition

Cyclical unemployment refers to the type of unemployment that occurs due to fluctuations in the business cycle. It is caused by a decline in aggregate demand, leading to a decrease in production and layoffs.

Analogy

Imagine you're at an amusement park where the number of visitors determines how many ride operators are needed. When there's a decrease in visitors (aggregate demand), some ride operators may be laid off because there aren't enough people to ride all the attractions. This is similar to cyclical unemployment, where workers are laid off due to a decrease in demand for goods and services.

Related terms

Frictional Unemployment: Frictional unemployment refers to temporary unemployment that occurs when individuals are transitioning between jobs or entering the workforce for the first time.

Structural Unemployment: Structural unemployment is caused by changes in technology or shifts in the structure of industries, making certain skills obsolete and leaving workers unemployed.

Natural Rate of Unemployment: The natural rate of unemployment represents the level of unemployment that exists when an economy is operating at its potential output. It includes frictional and structural unemployment but excludes cyclical unemployment.