Consequences of recession for consumers, workers, producers/firms and the government

Government and the Macro‑economy – Economic Growth

Objective

To understand the consequences of a recession for the four main groups in the economy:

• Consumers
• Workers
• Producers / Firms
• The Government

What is a Recession?

A recession is a period of falling real GDP for at least two consecutive quarters, accompanied by a rise in unemployment and a fall in consumer and business confidence.

Consequences for Consumers

• Reduced Real Incomes: Lower wages or job loss means less disposable income.
• Higher Uncertainty: Consumers postpone big‑ticket purchases (cars, houses, holidays).
• Lower Consumption: Decrease in aggregate demand, measured by \$C\$ in the AD equation \$AD = C + I + G + (X-M)\$.
• Increased Savings Rate (forced): Some households increase precautionary savings, further reducing demand.
• Access to Credit: Banks tighten lending criteria, making loans more expensive or unavailable.

Consequences for Workers

• Rising Unemployment: Firms cut staff to reduce costs. The unemployment rate can be expressed as

  \$U = \frac{\text{Number of unemployed}}{\text{Labour force}} \times 100\%.\$

• Reduced Hours / Pay Cuts: Employers may introduce part‑time work or lower wages.
• Skill Deterioration: Long periods of unemployment can erode job‑specific skills.
• Increased Competition for Jobs: More applicants per vacancy, giving employers greater bargaining power.
• Psychological Effects: Stress, lower morale, and reduced consumer confidence.

Consequences for Producers / Firms

• Falling Sales and Profits: Lower consumer demand reduces revenue.
• Inventory Buildup: Unsold stock ties up capital.
• Cost‑Cutting Measures: Lay‑offs, reduced investment, and postponement of expansion projects.
• Access to Finance: Higher interest rates or tighter credit conditions increase borrowing costs.
• Potential for Bankruptcy: Small firms are especially vulnerable to cash‑flow problems.
• Shift in Market Structure: Some firms may exit, leading to increased market concentration for survivors.

Consequences for the Government

• Lower Tax Revenues: Reduced income tax, corporation tax, and \cdot AT collections.
• Higher Expenditure: Increased spending on unemployment benefits, welfare, and stimulus measures.
• Budget Deficit & Public Debt: The gap between revenue and spending widens, often financed by borrowing.
• Monetary Policy Constraints: Central banks may lower interest rates, but near‑zero rates limit further cuts.
• Fiscal Policy Responses:

  1. Expansionary fiscal policy – increased government spending (\$G\$) or tax cuts to boost AD.
  2. Automatic stabilisers – unemployment benefits and progressive taxes that automatically inject demand.

• Political Pressure: Public demand for action can lead to policy shifts, sometimes with long‑term implications (e.g., higher debt levels).

Summary Table of Impacts