The Bad Economist

What are discouraged workers? April 9, 2016

What’s the difference between these two workers?

Vic loses his job. He looks for work for a while, but eventually realizes there are no jobs available for him. He decides to stop looking.

And:

Todd loses his job. He looks for work for a while, and even when no jobs seem to be available, he keeps looking. He still can’t find a job.

Unemployment rate with and without discouraged workers. Note the spread, which ballooned during the recession.

The answer is clearly that the only difference between Vic and Todd is that Todd continued looking when Vic didn’t. Is that a distinction without a meaningful difference? Not according to economists, who would classify Todd as unemployed because he’s actively seeking full-time work and Vic as a discouraged worker.

The Bureau of Labor Statistics defines a discouraged worker as someone who looked for work in the last year, but who stopped looking because they think there is no work or that they aren’t qualified for the work available. These workers may consider themselves unemployed, but they don’t qualify for the BLS’ definition of unemployment, which requires the worker to be actively seeking work. Thus, there are a lot of workers who wish they were employed, but can’t find work – but they don’t count as unemployed, because they stopped looking for jobs.

When the economy improves, many discouraged workers move out of that category and into the category of “unemployed” by beginning to look for work. This leads to a paradox: when the economy starts to improve, there are fewer discouraged workers, because they become unemployed instead – so the unemployment rate goes up! For that reason, economists generally take a short uptick in the unemployment rate which follows a long-term downward trend as a good sign for the economy, since it means workers are more optimistic about the economy.

Graph is courtesy of FRED.