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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.

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.

Do You Know What You're Worth?

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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