Final answer:
When the output gap is negative, cyclical unemployment is positive, as the economy is not performing at its full potential, leading to decreased demand for labor and higher unemployment rates.
Step-by-step explanation:
According to Okun's law, when the output gap is negative, cyclical unemployment is positive. This is because a negative output gap implies that the economy is producing below its potential GDP, which leads to a decrease in the demand for labor. As a result, the rate of cyclical unemployment rises when the economy is underperforming.
Fighting unemployment or inflation often involves understanding the relationship between unemployment rates and economic output. Cyclical unemployment is a type of unemployment that fluctuates with the business cycle and occurs when there is a downturn in the economy. It differs from frictional unemployment, which occurs when workers are between jobs, and structural unemployment, which results from industrial reorganization or changes in the economy that make certain skills obsolete.
The different types of unemployment—cyclical, frictional, and structural—explain why the unemployment rate never falls to 0%. Cyclical unemployment will be zero only when the economy is at its potential GDP, while frictional and structural unemployment are part of the natural rate of unemployment.