When is the US in a Recession and How Does It Impact Unemployment?
Having been in the staffing business for 58 consecutive years (yes, I recognize this is a VERY long time :), I am reminded I have been through eight or nine US recessions. The worst I remember (and directly felt the impact), was in 1982-83 when interest rates approached 20% and unemployment was 14%. Let’s look at what triggers a US recession and how our country’s businesses respond relative to unemployment.
In a recent poll of economists, the World Economic Forum found that nearly two-thirds of the respondents believe there will be a recession in 2023. However, many experts remain hopeful it will not be too severe. This is good news for everyone, as it could mean fewer people lose their jobs, and household financial impacts will be mild.
It is said, unemployment “rises like a rocket and falls like a feather.” When a recession starts and companies look for ways to manage slowing demand for the goods and services that they sell, many resort to laying off workers to cut relative costs. And unemployment seems to be contagious: Layoffs tend to snowball as job losses depress demand.
Those laid-off workers spend less, which weakens economic forecasts even further. Companies hire less, making it more difficult for newly unemployed workers to find their next jobs, and they stay unemployed longer.
Rising unemployment is one of a number of indicators that define a recession. It also makes the downturn worse.
Officially speaking (at least for the US), the National Bureau of Econoic Research (NBER) uses a number of KPIs (key performance indicators) to determine when recessions start and end, including:
The monthly nonfarm payrolls report and household employment survey
Real personal income less transfers
Real personal consumption expenditures
Wholesale and retail sales
While many factors determine if the economy is in recession, the simplest definition is two quarters of negative economic growth. By that measure, the U.S. was in recession in early 2022, yet unemployment continued falling even as economic growth faltered.
The Extra Costs of Unemployment in a Recession
As mentioned, unemployment is contagious—initial layoffs occur when the recession starts cut demand as unemployed workers spend less, cutting demand further, which can in turn lead to more layoffs. The negative feedback loop eventually runs out of steam, but not before inflicting lasting damage on the economy and workers.
People who lose jobs during recessions, especially deep recessions, are more likely to become long-term unemployed and find it more difficult to reenter the labor market later. Among workers who lost their jobs during the Great Recession (2008), only 35% to 40% were employed full time by January 2010. Reemployment rates remained unusually low as late as 2013.
Another survey found men lose an average of 1.4 years of earnings if laid off when unemployment is below 6%, but they lose twice as much if the unemployment rate is above 8%.
Beyond its immediate economic costs, long-term unemployment also damages public health and the economy’s long-term productive potential.
How has unemployment been different in recent recessions?
Historically, unemployment improves long after the official end of the recession. This is because a recession ends when the economy hits bottom, and companies start to rehire only after that point, often well after the economy has started to recover. But in the COVID-19 pandemic-induced 2020 recession, employment recovered more quickly than the economy, for the first time in 70 years. The same thing happened in 2022, when the economy shrank during the first and second quarters, but unemployment actually declined, even as the economy shrank.
The Bottom Line
Recession and unemployment go hand in hand—a spike in unemployment and its persistence are hallmarks of a recession, and joblessness in turn aggravates recessions. The short-term and long-term costs of unemployment have led governments to develop a range of policy measures aimed at curbing joblessness during downturns. The two most recent recessions (in 2020 and 2022) have been different, as unemployment improved more quickly than in most economic cycles, recovering before economic growth did.
