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Unemployment Realities: The Discouraged Worker Effect

By Andy Ewing, PayScale.com

The U.S. added about 96,000 jobs and the unemployment rate dropped by two-tenths of a percent in August, so why aren’t we happy? The numbers have been dissected elsewhere, but I wanted to focus on explaining the so-called “discouraged worker effect” and alternative measures of underutilization of labor.

A long time ago, in a state far away, 19th century statistician Carroll Wright gave us the crucial qualification that to be counted as unemployed—you must be actively seeking work. In the modern household survey, a monthly survey done by the Census Bureau for the Bureau of Labor Statistics (BLS) to determine our unemployment rate, you are considered unemployed if you are out of work and made “specific efforts to find employment sometime during the 4-week period ending with the reference week.” If you still want a job but made no specific effort, you are considered a discouraged worker. You’re out of work and you’ve given up trying to find any. You are “discouraged” but not “unemployed.”

Because “discouraged workers” don’t count toward the unemployment rate, we can actually see the unemployment rate drop (isn’t that supposed to be good?) even when unemployed workers move into the “discouraged worker” category rather than move from being unemployed to employed.

Should the Way We Define the Unemployment Rate Change?
The definition for the official unemployment rate is unlikely to change anytime soon, probably to keep historical comparisons intact. However, the BLS does give us some ways to dig a little deeper to figure out what is going on in the labor market. My personal favorite is Table A-15, a supplementary table released along with the monthly jobs report news release that gives us alternative measures of labor underutilization. It allows us to play with the definition of unemployment to account for these discouraged workers. Note that if we include those discouraged workers, the unemployment rate would currently be 8.6 percent instead of 8.1 percent. Including marginally attached workers – those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months – increases the rate further.

More Impacts from the Discouraged Worker Effect
The discouraged worker effect impacts the official unemployment rate in an interesting way. The BLS defines the labor force as the total number of employed workers plus the total number of unemployed workers. The unemployment rate is defined as the number of unemployed persons as a fraction of the labor force. If an unemployed worker becomes discouraged, they exit both the numerator and denominator of that calculation, and the unemployment rate falls, even though the labor market may be getting worse.

Why Should We Care About Discouraged Workers?
So, why do we care? Only one unemployment rate typically gets reported, and it is this official rate that usually factors into a voter’s choice in an election year. The Romney campaign is trying to highlight slow job growth and discouraged workers; the Obama campaign is highlighting positive job growth and a decline in the official unemployment rate. Same numbers, different spin.

Who should we believe? I, for one, like to go back to the original report to see what the researchers at the BLS have chosen to highlight. After all, they are the ones that gave us the data in the first place. In the August 2012 press release, they note that “2.6 million persons were marginally attached to the labor force, essentially unchanged from a year earlier.” The fact that this large number of marginally attached workers is unchanged over the past year is a discouraging sign for the current and future health of the labor market.

Andy Ewing is an economist and writer living on Bainbridge Island, Wash. He earned his Ph.D. in Economics from the University of Washington. He has taught economics at Eckerd College and conducted research in the economics of education.


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