Steve Bain

Discouraged Workers & Unemployment

The term 'discouraged workers' has become popularized in modern economics in relation to the large number of people who would like to gain employment but who have given up looking for it. It's a phenomenon that never had much relevance until modern times, because traditionally there was never that much difficulty in obtaining work for anyone who desired it.

I think a key reason for the emergence of this sort of problem is related to the relatively more specialized and skilled types of employment that exist in modern economies these days, and a growing reluctance on the part of potential workers to accept entry-level low-wage work when access to the preferred career jobs (for which they have skills) is not available.

Discouraged workers definition

To be precise, a discouraged worker is anyone of working-age who is not in employment because they have given up looking for it. These people fail to meet the criteria for being classified as officially unemployed because they are not actively seeking work, and by the same reasoning they are not counted within the labor force statistics.

Typically, this form of non-participation in the labor force data relates more to married people who, whilst they would prefer to earn a second income, are able to get by at least temporarily on their spouse's income. Research into discouraged workers has, for this reason, tended to focus on the circumstances and preferences of married women and their employment ambitions.

What are the causes of discouraged workers?

One of the main causes of the increasing rate of discouraged workers in any given time-period is the state of the labor market. In times of the business cycle when there are a lot of job vacancies advertised and the demand for workers is high, the perceived ease of gaining a suitable job will be higher and will therefore encourage extra workers to participate in the labor force.

In economic terms we say that the expected utility of job search activities is higher when job openings for additional workers are abundant, and lower when job openings are scarce.

Discouraged worker effect & added worker effect

Since the incidence of discouraged workers is highest when the expectation of being able to successfully enter employment is lowest, it follows that this problem is at its worst in deprived areas because job opportunities are lowest there, and the labor force is least equipped to gain work.

In these deprived areas, the persistent nature of unemployed potential workers leans towards a structural problem in the labor market, i.e. structural unemployment, but there is also a strong cyclical component.

There are several groups of people who are known to face particular 'barriers to work', and these groups are over-represented in deprived areas. They include:

  • Those with low or no skills
  • Those with disabilities
  • The over 50s
  • Lone parents
  • Ethnic minorities

The extra barriers that these groups face, whether perceived or real, does lead to a higher incidence of discouraged workers. For more details on this, see my article about Barriers to Work.

The strong association with the business-cycle means that the incidence of discouraged workers adds to cyclical unemployment numbers, and there are calls in some western countries for estimates of the effect to be added to the official unemployment numbers. So far those calls have gone unheeded, and there is little political support for such inclusion since it would result in less faltering unemployment statistics overall.

Inclusion of discouraged workers in the official unemployment statistics would flow in the opposite direction of pretty much all amendments in recent decades, which by curious coincidence always seem to favor the government of the day with lower numbers of unemployed workers reported. 

The 'added worker effect' in the study by Xiadong Gong (see link below) refers to a situation in which a woman's husband becomes unemployed, and her reaction to that in terms of entering the labor force. The economic rationale here would be to expect that the overall decline in family income following a spouse's job loss, would be to increase the labor force participation rate of other family members.

The study confirms that the added worker effect does indeed increase labor force participation by married women, but that it primarily results from already-employed women increasing the hours that they work rather than unemployed women successfully entering employment after their spouses become unemployed.

The findings also support the premise that, when spouses lose their jobs during an economic downturn, it is especially unlikely that women will be successful in entering employment themselves because of the discouraged worker effect, meaning that an increased proportion of them do not even attempt to enter employment during tough labor market conditions.

The Labor Force Participation Rate

The study by Dagsvik Et. al (see link below) estimates that the discouraged worker effect is very substantial when the job market is tight and the business cycle is in recession. They calculate that, on average, one-third of the married or cohabiting women in their study who had withdrawn from labor market participation had done so because of the discouraged worker effect.

They estimate that, from the business-cycle low point of 1988-1990, about 7.6% of the married or cohabiting female population were discouraged. That compares with just 1.6% during the 2006-2008 business-cycle peak.

The same study found that the corresponding figures for the labor force participation rate ranged from just 0.81 in 1988-1990 to 0.95 in 2006-2008.

Sources:


Related Pages:

Show / Hide