What Happens To The Labor Market During A Recession

During a recession, the labor market takes a big hit. Businesses lay off workers, and many who are still employed often see their hours and wages reduced. Could this be different in a future recession in light of the Great Resignation and gig economy? These factors have become an increasingly important part of the labor market in recent years, as more and more people turn to freelancing and contract work. This article will explore what happens to the labor market during a recession and discuss what could happen during the next one.

What is a recession?

Recessions are a part of life. They are caused by a number of factors, but most importantly, they happen when the economy slows down. This can be due to a variety of reasons, ranging from an increase in interest rates to a decrease in consumer confidence. When this happens, businesses see their profits fall and they respond by reducing their expenses. One of the biggest expenses for any business is labor.

For a more detailed answer, we turn to the National Bureau of Economic Research. Their research describes a recession as follows: “A recession is the period between a peak of economic activity and its subsequent trough, or lowest point. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity or its previous trend path may be quite extended.”

What happens to the labor market during a recession?

The labor market is one of the key indicators of economic health, so it’s no surprise that it can be affected by a recession. Here’s a look at how recessions can impact the labor market, both in the short- and long-term.

In the short-term, demand for goods and services declines during a recession, which can lead to layoffs. As companies downsizes and eliminates positions, unemployment rises. This increase in unemployment can lead to wage decreases as workers become willing to accept lower wages in order to find employment. In addition, working hours may be cut back and hiring slowed or stopped altogether.

In the long-term, however, things look different depending on how the recession went down. An excellent journal, The US Labor Market During and After the Great Recession, explains: “One explanation of the high degree of persistence of the after-effects of the Great Recession in the labor market is that high rates of unemployment, especially high rates of long-term unemployment, led to a lasting increase in the equilibrium unemployment rate, a pattern sometimes called hysteresis…A key feature of the labor market in the aftermath of the Great Recession was indeed the staggering increase in the proportion of unemployed that had spells of unemployment longer than twenty-six or fifty-two weeks, which at the trough of the Great Recession stood at more than double its historical value.”

The Great Resignation, gig economy, and future recessions

The term gig economy was coined by Tina Brown during the Great Recession in 2009. Meanwhile, the Great Resignation started before the pandemic but was rapidly accelerated by it. How will these massive labor market trends influence a future recession and vice versa?

The gig economy has allowed millions of people to take their careers into their own hands. Yet it has received criticism and legal rebuttal debating how fair gig work is. In many ways, this trend is a direct reflection of people taking matters into their own hands during a recession.

The thing about the Great Resignation and a recession is the shift in power dynamic. The Great Resignation has put the power in the hands of the workers, while a recession shifts some of the power back into the hands of the employers. A recession in modern times “may lead to some bargaining power losses, but with two job openings for every unemployed person in the current labor market, employees should be able to hold the line better than during past economic downturns,” writes CNBC.

How to prepare your business for a recession

Since recessions are part of life, they can only be dealt with, not prevented. The best way to deal with a recession is by preparing your business for one. And in modern times, that means diversify your talent base: an extended workforce could help your business stay afloat during tough times.

You’ll need to be sure you stay compliant with your extended workforce. That’s where GreenLight comes in. GreenLight’s innovative system uses all of the data and industry knowledge at our disposal in order to classify workers with an exceptionally high level of confidence. We’re classification experts who rigorously update and maintain our systems in compliance with the most recent laws, mandates, and court rulings.

With GreenLight, all you have to do is find the right person for the job. We’ll handle the rest. Schedule a demo today.