Question

During a recession, most firms experience a reduction in the demand for their products and service. In other words, their demand curve shifts to the left. In order to stay viable, they often lay off their employees. How does it affect labor productivity during recessions?

Answer 1

The business cycle is the big curse of the capitalist economy and so that economic booms as well as recessions. Companies often try to cut the cost in the face of falling demand and revenue. Labor force tends to be the ultimate target of companies and they start to layoffs.

Psychologically, it affects labor force adversely and productivity decreases. Employees feel disturbed and anxious as they see their colleagues being laid off. They fear that there could be another layoff and they might be in that list. According to behavioral economics, people feel anxious and fearful about losing what they have and further, they tend to accept the routine lifestyle which they have and most resist change in that. This type of pressure creates uncertainty in their minds which affects productivity negatively.

However, technically we can see that productivity rising as the number of labors gets reduced. Productivity is nothing but total output divided by the number of labor hours.