Why Does Unemployment Rise During a Recession?


Many companies are laying off workers at the same time during the recession, with limited job openings.

When companies go out of business, their assets are sold to other companies and their former employees are rehired by other competing companies, as is the normal course of business. With numerous companies in different industries and markets closing at the same time during the recession, the number of unemployed workers looking for new opportunities has grown rapidly. The number of workers ready for employment in the public sector is increasing, while companies' demand for new employees is decreasing.

Several variables specific to labor market and recessionary conditions can hinder the normal process of examining job, income, and employment levels:

1.Different Kinds of Capital and Labor

Economists and statisticians often ignore differences between the various inputs of competing business processes in order to simply generate aggregate economic and financial statistics that help measure aggregate economic performance, such as unemployment and GDP. While these broad conceptual numbers can be helpful, they obscure the fact that there are different types of workers, each with unique skills, knowledge, and experiences that make their jobs more or less suitable Different types of employers in different types of companies, in different locations and various capital goods and instruments. Much of the cyclical unemployment can be explained by this important component of capital and labor markets.

2.Job Matching

Workers and occupations come in all shapes and sizes. Choosing the right person for the right role requires market flexibility and time to minimize job losses.

Furthermore, both classifications require flexibility for both employers and employees. Flexibility in the ability to transfer and mix different types of employees and capital products between companies and markets, not only in terms of prices, wages, and quantities offered and demanded. If capital and labor markets were more flexible in this regard, the effects of recessions following the first shock would be less severe.

3.Market Rigidity

The bad news is that an additional set of hurdles could mean capital and labor markets aren't flexible enough to avoid long-term job losses during a downturn.

One reason the newly unemployed have difficulty finding new jobs during a recession is that the labor market is not quite the same as the ideal market taught in basic economics courses. Wages can be "sticky," which distinguishes the labor market from many other commodity markets. In other words, employers and workers may be reluctant to agree to pay cuts even when demand for labor is low and supply is high.

4.Sticky Wages

In an economic downturn, both workers and employers may be reluctant to take pay cuts.

During a recession, unemployed workers may find jobs they once held, or even entire industries, gone. This could be due to technological obsolescence or a shift in economic structure due to an economic catastrophe that could trigger a recession.

Even in the absence of any of these causes, the accumulation of recessions often leads to overinvestment in certain industries and business activities and related human capital, resulting in concentrated losses when recessions hit. Often, these companies and activities are very sensitive or depend on ample credit at low interest rates, which is not the case in a recession. The human capital of workers is simply not well transferred to other jobs because they are invested in these companies.

5.Government Guidelines

One of the biggest problems with recessions is that government intervention prevents the labor market from adjusting, exacerbating and prolonging unemployment. While not just targeting cyclical unemployment, such policy responses are a common aspect of recessions that are worth analyzing. There are multiple ways to do this, but the most important is monetary and fiscal policy that hinders structural change in the industry. To a certain extent, direct state intervention in labor market conditions also played a role.