Cyclical Unemployment

What it is:

Cyclical unemployment is the fluctuating rate of unemployment resulting from swings in the business cycle.

How it works/Example:

This type of unemployment increases during a recession and decreases during an expansion. Businesses are unwilling to spend money on wages when they believe consumers are not buying their products.

For example, an auto worker may be laid off during a recession, when people are buying fewer cars. When people buy fewer cars, the auto makers don't need as many employees to meet the consumer demand. So as the demand for cars decreases, so does the demand for auto workers.

As the economy strengthens, and consumers start to spend more money on goods (like cars), the unemployed auto worker will probably be rehired.

Why it Matters:

Cyclical employment cannot be a factor during periods of full employment. Structural unemployment and frictional unemployment still occur when the economy has reached its natural rate of unemployment.

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