When real GDP decreases, unemployment typically rises. This is mainly because a decline in real GDP indicates that the overall economy is shrinking. A fall in economic output usually leads to reduced demand for goods and services, prompting businesses to cut back on production.
As businesses scale down, they may lay off workers or halt hiring, contributing to higher unemployment rates. Some firms may even close down entirely if the economic downturn is severe, further exacerbating the unemployment situation. Additionally, as consumer confidence wanes during a GDP decline, spending tends to decrease, creating a cycle that further affects job growth and increases the unemployment rate.
In summary, a decrease in real GDP often signals economic distress, which inevitably leads to higher unemployment as businesses respond to the downturn by reducing their workforce.