Factors involved in Recession and reasons behind Layoffs
In recent times, we often listen to the term “Recession” and downfall in terms of economy and growth in various business sectors. Let’s know more about the recession and Layoffs followed by the recession.
A recession can be defined as a sudden decline in the economy over a business cycle in an unexpected way.
It can be illustrated as two consecutive quarters of economic decline.
This is denoted when GDP falls in comparison to the previous quarter.
Most of the time, recessions are caused by a complex combination of factors, including high-interest rates, low consumer confidence, or reduced real income in various sectors.
The factors that indicate recession are;
- Increase in unemployment
- Increase in bankruptcies or foreclosures
- Downfall in interest rates
- Downfall in consumer expenditure
- Low consumer confidence
- Downfall in asset prices
In general, we can say that there is more than one way for a recession to get started, from a sudden economic decline to fallout from unexpected and uncontrolled inflation.
Some of the main causes of a recession are;
- A sudden economic decline: An economic decline is a surprise problem that creates huge financial damage. The Covid outbreak, which shut down economies worldwide, is a most recent example of a sudden economic decline.
- Excessive debt: When businesses or people take too much debt, the cost of servicing the debt can grow higher where they can’t repay. This growth in debt leads to bankruptcies and foreclosures. In this way, we can say that excessive debt is an example of causing a recession.
- Uncontrolled inflation: Inflation is the standard, upward phenomenon in prices over time. Because of this, we cannot declare inflation a bad thing, but excessive inflation is a dangerous phenomenon. Central Banks control inflation by increasing interest rates, whereas higher interest rates decrease economic activity.
- Asset bubbles: The investors become too optimistic during a strong economy. This criterion results in bad economic outcomes most of the times. When the bubbles pop, panic selling can crash the market, causing a recession.
- Uncontrolled deflation: While uncontrolled inflation can create a recession, deflation can be even worse. Deflation can be defined as the situation when prices decline over time. This causes wages to contract, which further depresses prices. When the deflation feedback loop is out of hand, businesses and people reduce their expenditure and almost stop spending, which declines the economy. These underlying deflation problems can be fixed by the Central Government and economists by certain implementations.
- Upgradation in Technology: Whenever technology is changed, new inventions arise. This increases productivity and helps the economy over the long term. At the same time, there can be short-term periods of adjustment to technological breakthroughs. The Industrial Revolution replaced the manual effort with advanced machinery, leading to recession. This is the reason why some economists worry that Artificial Intelligence could cause recessions by eliminating huge categories of jobs.
The major effect of recession that is heard very often is a layoff.
Layoffs refer to a temporary or permanent termination of employees because of several business-related reasons. The layoff process may involve suspending just one employee or a group of employees at the same time.
It is necessary to note another point about layoffs is that they don’t occur because of the employees’ flaws. It may be described as the organization wanting to shrink or may experience various issues with personnel management. In turn, the organization reduces the cost spent on the employees.
Also, we can say that due to redundancy in positions, the employees are laid off on a permanent basis.
In this way, we can summarize the layoff process with several reasons which are illustrated below.
- Redundancies in positions: When a company needs to terminate some positions due to over–staffing, outsourcing, or a modification to the roles there exist layoffs. An organization may eliminate redundant positions in order to make its operations more efficient and accurate. This is achieved easily by introducing new management thereby redefining jobs which in turn is closely related to cost-cutting. During this process, layoffs may considerably impact the entire organization or sometimes only a few departments. The organizations try to expand some sectors like IT by shrinking other sectors like marketing which ensures organizational balance and support. In this aspect, some employees lose their jobs and at the same time, the organization is able to accommodate the new employees wherever required.
- Ensure cost reduction: The organizations lay off employees in order to cut back costs in some way. This is one of the main reasons behind the employees being laid off in any organization. This might be evidence that the organization is not making enough profits when compared to its expenses over a particular period of time or may need more profits to pay off the debts. It is not an easy task when an organization decides to lay off employees. This process is to be conducted in the right way to avoid further financial problems arising from lawsuit costs.
- Relocating the operations of an organization: In this case, the organization’s operations are moved from one place to another which leads to the elimination of some employees. The employees who get laid off alone are not affected by shutting down the initial location but the community’s economy is also equally affected. It is the organization’s responsibility to show genuine concern toward its employees by providing them with the necessary resources to help them adjust.
- Organization is merged or bought out: The organization’s leadership and corporate direction may change if a business is bought out or merged with another. The new management may come up with new goals and objectives leading to layoffs. At this point in time, the new management will thoroughly trace each employee’s position, performance, and experience based on which the layoff procedure depends.
- Implementation of voluntary retirement: Sometimes the organization needs to reduce its workforce by asking the employees who just want to step down voluntarily. As a part of this process, the management offers older employees a retirement package as an incentive. Thus, a voluntary retirement program enables employees to transition to retirement smoothly. Adoption of this type of strategy benefits the organizations economy in two ways. One is the management reaches its goal of workforce reduction and the second one is, that the management saves money since the highly paid employees retire voluntarily.
- Offering the employees more unpaid time off The management can same economy by offering the employees more unpaid time off. For example, the employees can be asked to skip work on some days or offer an additional two weeks of vacation whenever as per the requirement.
- Virtual office operations: The most important stuff is only kept onsite by sending the rest of the employees home to work remotely. This is a way to cut down the costs in an organization. This process is well managed by the management by coordinating with the employees remotely through modern technologies like google meet and various other modes of video conferences.
When we come across a financial crisis, many organizations think that they need to lay off employees for various reasons. The most common reasons why the employees are laid off comprise staff reduction, cost-cutting, relocation, mergers, and buyouts.
Instead of terminating the employees’ contracts, the management can choose other options like offering more unpaid time off, setting a cut back on the extra expenses, and adopting virtual work setups.