Canadian Securities Course (CSC) Level 1 Practice Exam

Which type of unemployment is tied directly to the fluctuations in the business cycle?

1. Cyclical unemployment

2. Seasonal unemployment

3. Frictional unemployment

4. Structural unemployment

The correct answer is: Cyclical unemployment

Cyclical unemployment is indeed the correct answer, as it refers to the unemployment that occurs due to the fluctuations in the business cycle — that is, the periodic expansion and contraction in economic activity. During periods of economic downturn or recession, businesses often reduce their production and may lay off workers, leading to an increase in cyclical unemployment. Conversely, when the economy is thriving, production increases and businesses hire more, reducing cyclical unemployment. Seasonal unemployment occurs due to predictable changes in the demand for labor throughout the year, such as during holiday seasons or agricultural cycles, and is not directly tied to the overall economic cycle. Frictional unemployment happens when individuals are temporarily unemployed as they transition between jobs; this type is more related to the individual's job search process rather than broader economic conditions. Structural unemployment arises from changes in the economy that create a mismatch between the skills of workers and the needs of employers, often due to technological advancements or shifts in industry. This form of unemployment is not necessarily linked to the cyclical changes in the economy.