Unemployment and Recession. What’s the link?

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Recession is a period of negative growth for successive quarters. The definition of a recession is incomplete without Unemployment and job losses. The rise and fall of unemployment rates mark the period of a recession. Due to less demand & dipping revenue, companies begin to lay off employees which results in a spike in the number of unemployed workers. During The Great Depression of 2008-09, a total of 8.8 million jobs were lost. This graph illustrates how unemployment rose during that time.

During a recession, the general public becomes fearful of spending leading to a reduction in demand. This hurts the top line of companies and they try to cut costs. Usually, the first name on that list is payroll. When there is no demand, productions are sliced and all eyes are on getting rid of excessive labor.

Economics of Unemployment

Typically in every organization, different employees have different levels of skills. So, if an employer chooses to reduce the salary of each employee to ensure equality, the high skilled workers will lose motivation to work hard. Similarly, a low-skilled worker will start to enjoy the idle time more. This will hurt the organization more than simply laying off low skilled workers. Now all these unemployed workers will look for another job which is looking for a highly skilled workforce. This starts piling up and due to this reason unemployment rates rise sharply during the recession.

Now, during a pandemic, some industries are hit harder than others. E.g. – construction and real estate industries suffered in the 2008 recession. So the laid-off workers have to be fitted in the same roles and industry they are coming from. Job Matching is the process of ensuring that the right workers are matched up to the right jobs. This process takes time and economic flexibility which results in lengthening the recession.

Recovery

After the period of a recession gets over, demand from consumers begin to rise. Generally, the bounce-back effect of the economy is determined by the severity of the recession (V-Shape/U-Shape Recovery). It takes flexibility on both the employee and employer side. Employees need to upskill and employers need to create more jobs. Here, monetary policies play a crucial role. As the interest rates are cut, people tend to spend freely. This certainly helps economic recovery. It has been seen in the past that employment rates shoot up after recession and 9 out of 10 times recovery follows a V-shaped curve. In the COVID situation too, the emerging patterns seem to follow a V-shape graph.

Although the unemployment rate is difficult to predict, bracing ourselves for the economy shoot and upskilling is the best thing to do as of now.

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