September 20, 2019

What is the relationship between unemployment and recession?

Recession affects numerous sectors, including the job sector. It slows down economic growth and forces companies to generate less revenue than they expect. This in turn leads to unemployment since some companies are forced to lay off some of the workers because they cannot afford to pay them. Laying off some of the workers helps the company also cut down on some costs.

Increased unemployment also reduces consumer spending during a financial crisis. This slows down growth. During the global financial crisis, the number of unemployment went up, and companies were not able to generate revenue. This almost collapsed the US economy in 2008.

Before we look at the relationship between unemployment and recession, we must examine the factors that drive employment and growth. Gross domestic product (GDP) is used to measure growth in an economy. GDP represents the total of services and goods that a country produces over a specific duration. Business investment and consumer spending are the key factors that drive growth.

If consumer spending is stable, more people make purchases on things such as cars, home, clothes, and even electronic devices. Increased consumer spending leads to more employment creation in different industries. The number of retail markets goes up, and more people invest their money in the clothing sector to fulfill the needs of customers. Consumer spending also leads to the growth of banks since more financial institutions supply mortgages and credit cards to customers.

A favorable economic outlook makes companies expand their operations. Businesses are likely to invest more in lucrative opportunities that may bring more returns. Entrepreneurs try to expand their operations by purchasing technological equipment that can boost the production of goods and services. Companies are, therefore, more likely to hire more employees that can help them boost production and increase sales. They also hire software engineers that can program machines and people to market their businesses to more customers.  An increase in business investment also boosts other companies, such as financial institutions that offer entrepreneurs finances to buy new equipment.

When an economy faces recession, it decreases business sales and prevents businesses from expanding. This also lowers the demand for goods and services. A company can start reporting losses instead of making profits. During the 2008 financial crisis, banks were affected due to a high number of mortgage defaults. They ended up suffering from massive losses making it hard for them to issue new loans to business owners.

This also led to a decline in business spending as many companies struggled to make revenue. Most of them tried to minimize their costs by reducing wages, and they stopped hiring new employees. This led to unemployment growth. Recession not only leads to unemployment but also the bankruptcy of some companies. The lack of creating new jobs leads to less business investments and consumer spending. Since the demand for goods and services also goes down, the overall economy is affected negatively. You can find out more about the link between unemployment and recession from financial crisis blogs.