How to Calculate Cyclical Unemployment
Cyclical unemployment equals the actual unemployment rate minus the natural rate, and the answer can be negative when output runs above potential.
The Cyclical Unemployment formula
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Subtract the natural rate from the actual unemployment rate to size the cyclical piece and read its sign.
Unemployed divided by the labor force, times 100, as reported for that period.
Frictional plus structural unemployment, the share that survives full employment.
Unemployment runs 3.4% above the natural rate, the slice a weak economy opened up.
- Labor market reading
- Below full employment
- Output gap
- Recessionary gap
- Cyclical share of unemployment
- 40.5%
Full employment means cyclical unemployment of zero, not an unemployment rate of zero.
Cyclical unemployment comes from weak aggregate demand, so expansionary fiscal and monetary policy target it.
Whatever is left over is frictional and structural, and no demand-side policy fixes those.
How to calculate Cyclical Unemployment, step by step
- 1Find the actual unemployment rate. Unemployed ÷ labor force × 100, as reported for that period.
- 2Find the natural rate. Frictional plus structural unemployment, the share that remains even at full employment.
- 3Subtract. Cyclical unemployment = actual rate − natural rate.
- 4Read the sign. A positive answer points to a recessionary gap; a negative answer means the economy is producing beyond potential output.
Worked example: Cyclical Unemployment
The actual unemployment rate is 8.4% and the natural rate is 5.0%, so cyclical unemployment = 8.4 − 5.0 = 3.4 percentage points. Two periods later the actual rate falls to 4.2%, so cyclical unemployment = 4.2 − 5.0 = −0.8, which describes an overheating economy rather than a recession.
Cyclical Unemployment questions
Can cyclical unemployment be negative?
Yes. When actual unemployment drops below the natural rate the economy is producing above potential, and the negative value signals an inflationary gap.
Which policies target cyclical unemployment?
Expansionary fiscal and monetary policy, because cyclical unemployment comes from weak aggregate demand. Neither tool cures frictional or structural unemployment.
How does cyclical unemployment relate to the output gap?
They move together: positive cyclical unemployment goes with a recessionary output gap. Okun's law ties each percentage point of cyclical unemployment to a larger percentage shortfall in real GDP.
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