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This paper analyzes the macroeconomic implications of cyclical labor market policy adjustments in a New-Keynesian economy with asset and labor market frictions. The policies of interest include Unemployment Insurance (UI) and Employment Protection (EP). Along with their supply-side effects, labor market policies also affect aggregate demand via earning risk and redistribution channels. The general equilibrium interactions between demand and supply in response to cyclical policy adjustments constitute the primary policy issue in this study. I find that UI extension has a considerably adverse impact on labor demand when agents determine wages according to bilateral bargaining. Thus, pro-cyclical UI stabilizes an economy through supply and demand channels, delivering substantial welfare gains from stabilization. On the other hand, EP has a larger impact on job destruction than creation. Counter-cyclical EP improves welfare through stabilization at the cost of production inefficiency. The policy implications fundamentally hinge on the wage-setting assumption. A wage rule independent of worker surplus renders counter-cyclical UI and pro-cyclical EP beneficial for stabilization and welfare outcomes.