What Happens to Jobs During a Recession?

It's an important thing to know.

"Gear up for a 2023 recession."

"Boost your savings account now."

These were some of the warnings being hurled at consumers during the second half of 2022, when inflation was surging and the Federal Reserve was aggressively raising interest rates in an effort to cool it down.

But what exactly is a recession, and what does it mean for jobs? Let's take a closer look.

What's a recession, anyway?

There are different metrics that can be used to measure a recession. Investopedia says it's defined as two consecutive quarters of negative gross domestic product (GDP).

But there's a little more to the story than that. A recession is basically a period of widespread and notable economic decline. It's possible to technically reach recession territory based on GDP alone without consumers feeling the pain all that much. But when consumer spending drops to a notable degree, that's the sort of recession people tend to feel.

Now, recessions can be mild or extreme. They can also be short-lived or prolonged. There's no single, specific pattern recessions follow.

It's also worth noting that stock values don't always plunge during a recession. Neither do home prices. But one thing that does tend to happen during a recession is that job loss activity picks up. And that's something you'll really want to prepare for.

The importance of emergency savings

During a recession, less money is being pumped into the economy. That commonly forces employers to make cuts, leading to widespread unemployment.

It's difficult to find yourself out of work even during the best of economic times. But the problem with getting laid off during a recession is that jobs don't tend to be abundant. So you might face the double whammy of losing your job and having a hard time finding another.

That's why it's so important to prepare for a recession by having a solid emergency fund. Without one, you could end up in a situation where you're forced to charge your bills on your credit cards, thereby landing yourself deep in debt.

As a general rule, it's a good idea to make sure you have enough money in savings to cover at least three full months of living expenses. But during a more intense, prolonged recession, it might take a lot longer than that to find a new job after becoming unemployed. So for even more protection, you may want to aim for six to 12 months' worth of bills in savings.

Now, the good news is that when you lose a job through no fault of your own (such as when your company has to make cuts during a recession), you're generally entitled to unemployment benefits. That can put some money in your pocket, though it usually won't come close to replacing your paycheck in full (though you may remember that in 2020, when lawmakers boosted unemployment benefits to cope with the pandemic, some workers were made whole on their missing paychecks thanks to enhanced jobless benefits).

Lawmakers have also, in the past, turned to stimulus checks during recessions. That's not something to count on, but it's a possibility.

Will there be a recession in 2023?

Even at this point, we still don't know. The Federal Reserve's interest rate hikes (more of which are expected to happen this year due to lingering inflation) might result in a major decline in consumer spending, which could lead to a recession. But if the Fed manages to strike the right balance and consumer spending doesn't drop to an extreme, a recession may be avoidable.

At this point, it's anyone's guess. Some financial experts have scaled back the dire recession warnings they were issuing during the latter part of 2022. But your best bet either way is to prepare for a recession by growing your savings so you have a backup plan in case your job ends up on the chopping block.