Recessions are periods of economic decline characterized by falling GDP, rising unemployment, and decreased consumer spending. While they affect everyone somewhat, certain groups are particularly vulnerable to financial hardship during these downturns.
Understanding who tends to be most at risk can help individuals and policymakers better prepare for and mitigate the impacts of economic contractions. These are the people who get wiped out first in a recession:
1. Recent College Graduates
Entering the job market during a recession can have long-lasting effects on your career trajectory. This phenomenon, known as “recession scarring,” often results in lower starting salaries and difficulty finding full-time employment in your chosen field. Graduates may find themselves underemployed or working in positions unrelated to their degrees, which can delay career advancement and impact earnings potential for years.
The challenges faced by recent graduates during a recession extend beyond immediate job prospects. They may struggle to begin repaying student loans, delay significant life milestones like homeownership or starting a family, and experience higher levels of financial stress compared to those who graduated in more favorable economic conditions.
2. Contract and Temporary Workers
In times of economic uncertainty, companies often look to reduce costs by cutting flexible labor first. This puts contract and temporary workers in a precarious position. These individuals typically lack job security, benefits, and the protections afforded to full-time employees, making them easy targets for layoffs when budgets tighten.
The gig economy, which has grown significantly in recent years, is particularly susceptible to the effects of a recession. Freelancers and independent contractors may see a sharp decline in available work as businesses and individuals reduce non-essential spending. Without the safety net of unemployment benefits or employer-sponsored health insurance, these workers can quickly find themselves in dire financial straits.
3. Retail and Hospitality Workers
Consumer spending habits change dramatically during recessions, with people cutting back on non-essential purchases and experiences. This directly impacts workers in the retail and hospitality sectors, who often face layoffs, reduced hours, or complete business closures.
These industries are often considered “non-essential” during economic contractions, making them prime targets for cost-cutting measures. E-commerce has further complicated brick-and-mortar retail workers as consumers increasingly shift to online shopping during tough economic times.
4. Real Estate and Construction Workers
The housing market is closely tied to overall economic health, and downturns can severely impact the real estate and construction industries. As home sales slow and property values decline, real estate agents may struggle to make sales and earn commissions. Construction projects may be delayed or canceled altogether, leaving workers without steady employment.
The cyclical nature of construction work makes it particularly vulnerable to economic shifts. When the economy contracts, residential and commercial building projects tend to dry up, leading to widespread layoffs. This can create a ripple effect, impacting related industries such as home improvement, furniture sales, and building materials suppliers.
5. Small Business Owners with Thin Margins
Small businesses often operate with limited cash reserves, making them especially vulnerable during economic downturns. When consumer spending decreases, these businesses may struggle to maintain cash flow, pay employees, and cover operating expenses. Unlike larger corporations, small businesses typically have less access to credit or capital to weather extended periods of reduced revenue.
The challenges faced by small business owners during a recession can be overwhelming. They may be forced to lay off employees, reduce hours, or even close their doors permanently. The personal financial risk is often high, as many small business owners invest significant personal resources into their ventures.
6. Highly Leveraged Investors
Investors who rely heavily on borrowed funds to finance their investments face substantial risks during economic downturns. When asset values decline, these highly leveraged investors may face margin calls, requiring them to deposit additional funds or sell assets at a loss to cover their positions.
In severe market downturns, the combination of falling asset prices and the need to repay loans can lead to rapid wealth depletion for these investors. This can create a vicious cycle, as forced sales further depress asset prices, potentially triggering more margin calls across the market.
7. Workers in Cyclical Industries
Specific industries are known for their sensitivity to economic cycles. They experience boom times during expansions and sharp contractions during recessions. Examples include automotive manufacturing, travel and tourism, and luxury goods. Workers in these sectors often face layoffs or reduced hours when consumer demand drops during economic downturns.
The amplified effects of economic cycles on these industries can make it challenging for workers to maintain stable employment and income. Some may need to consider career changes or develop new skills to transition to more recession-resistant fields.
8. Middle-Income Households with High Debt
Households carrying significant debt relative to their income are particularly vulnerable during recessions. This includes those with large mortgages, auto loans, or credit card balances. Paying these debts becomes increasingly tricky when income is reduced or lost due to layoffs or reduced hours.
Defaulting on debts during a recession can have long-lasting consequences, including damage to credit scores, potential foreclosure or repossession of assets, and difficulty obtaining credit in the future. This financial stress can strain relationships and impact overall well-being.
9. Older Workers Near Retirement
Workers approaching retirement age often face unique challenges during recessions. They may be targeted for early retirement or layoffs as companies look to reduce costs by replacing higher-paid senior employees with younger, less expensive workers. Re-entering the job market at an advanced age can be extremely difficult, especially during an economic downturn.
Recessions can also significantly impact retirement savings, potentially forcing older workers to delay retirement or accept a lower standard of living in their golden years. The combination of job loss and reduced investment values can be particularly devastating for those with limited time to recover financially before retirement.
10. Recent Homebuyers with Minimal Equity
Those who purchased homes shortly before a recession, especially with small down payments, risk finding themselves underwater on their mortgages if property values decline. This situation, where the mortgage balance exceeds the home’s value, can trap homeowners in properties they can’t afford to sell.
During housing market downturns, recent homebuyers with minimal equity face an increased risk of foreclosure if they experience income loss or financial hardship. The inability to refinance or sell the property without taking a loss can exacerbate financial stress and limit options for improving your situation.
Conclusion
While recessions impact the entire economy, certain groups face disproportionate risks of financial hardship and long-term setbacks. Understanding these vulnerabilities can help individuals, policymakers, and businesses better prepare for economic downturns.
Building financial resilience through emergency savings, diversifying income sources, and maintaining manageable debt levels can provide some protection against the worst effects of a recession.
Developing adaptable skills and staying informed about economic trends can help you navigate challenging times more effectively. By recognizing the patterns of who tends to be most affected by recessions, you can work towards creating better safety nets, and politicians can make better economic policies that protect the most vulnerable members of society during times of financial stress.