February 2010 No.2
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Clearing up Misunderstandings about Discouraged Workers
Clearing up Misunderstandings about Discouraged Workers
As the nation pulls itself through the recession, unemployment rates and other labor force data have risen to the forefront of economic news. Although data on the unemployed is only one gauge of the economy’s strength, they are perhaps more closely observed by analysts and the public at large. Statistics pertaining to discouraged workers, in particular, are under scrutiny.
How discouraged workers affect labor force data has raised questions about the measurement of unemployment. Discouraged workers are officially considered to be outside of the labor force and thus, outside of the unemployment estimate. In the current economic climate, some wonder whether the estimate of those suffering from increasing unemployment can be accurate without counting discouraged workers. Several news articles and opinion pieces claim a “real” unemployment estimate must include discouraged workers. But often, the term “discouraged workers” is ill-defined and data
about this population is presented in a vague or incomplete manner.
This article will define discouraged workers, explain how they appear in official labor force data and show that this group, alone, would have a minuscule effect on both the U.S. and Illinois unemployment rates if it were included in the estimates.1
Defining Labor Force and Discouraged Workers
Every month the U.S. Census Bureau conducts a sample survey of 60,000 American households through the Current Population Survey, which is published by the Bureau of Labor Statistics. This survey measures the extent of employment and unemployment in the country. It als measures those who are not in the labor force.
The labor force consists of people 16 years of age or older who are employed and unemployed. The U.S. government defines the “employed” as those who are currently working or are temporarily away from work. Those who are not currently working but available to work and looking for jobs are considered “unemployed.” Those who do not fit either of the above categories are considered to be not in the labor force. These include students, retirees and those whose family responsibilities kept them from employment.
A subset of those not in the labor force group is referred to as marginally attached to the labor force. This group wanted and was available to work and looked for work sometime within in a 12-month period, but it did not actively seek employment in the four weeks prior to the monthly survey.
A further subset of marginally-attached workers is discouraged workers, who gave thefollowing specific reasons as to why they did not look for work in the four weeks prior to the monthly survey:
1) The belief or fact that no work is available.
2) An inability to find work.
3) The belief or fact that the prospective worker lacks the necessary education or training to obtain work.
4) The belief or fact that employers find the prospective worker either too young or too old.
5) The existence of other discrimination that will prevent a prospective worker from finding employment.
Alternative Measures of Labor Underutilization
Apart from measuring the labor force, the Current Population Survey attempts to follow the movements of the unemployed by using six alternative measures of labor underutilization. The Bureau of Labor Statistics currently publishes these six measures, known as “Urates,” at the national and state level.2 Each of the six measures shows various levels of weakness in the labor force and creates a more comprehensive picture of the labor force as a
whole. The focus of this analysis will be on two of the alternative measure U-rates:
• U-3, which is total unemployed as a percent of the labor force. This is the same as the official unemployment rate.
• U-4, which is total unemployed plus discouraged workers as a percent of the labor force.
National Discouragement Measure Similar to Unemployment Rate
Chart 1 shows annually-averaged U.S. unemployment rates and U-4 rates from 1999 to 2008. The U-4 discouragement measure moves in the same direction as the unemployment rate. Table 1 shows the difference between the two measures in absolute numerical terms. Note that discouraged workers could add to an unemployment rate but in relatively small numbers. The table also shows how economic recession can impact the labor force. When the economy is growing, finding employment is relatively easy, and fewer workers appear to be discouraged. During economic decline, finding
employment is relatively hard, and one can see increases in rates of discouragement.
The recession of 2001, which began in March of that year, is refl ected in the sharp increase in the unemployment rate and the U-4 discouragement rate. The aftermath of the September 11, 2001 terrorist attacks only amplified the economic downturn. This is noticeable in the increasing unemployment and
U-4 rates through 2002 and 2003. But note how the amount of numerical change between the two rates remains relatively steady year to year, drifting slowly from 0.2 to remaining a steady 0.3 through the latter part of the decade This look back to 2001 and its aftermath can give some possible perspective on the current recession and its effect on workers.
Current Recession’s Impact on the Discouraged
The current recession began in December 2007, according to the National Bureau of Economic Research, the offi cial arbiter of business cycle data. The annual average data in Table 1 shows a marked increase in unemployment and U-4 data happening from 2007 to 2008. But a finer view can be shown of the recessionary event. An analysis in Table 2 of quarterly BLS data allows a better perspective of U.S. labor force deterioration.3
From the first quarter of 2008 to first quarter 2009, the number of unemployed moved from 8 million to 13.5 million, an increase of 69 percent. As shown in Table 2, during that same period, the number of discouraged workers rose by around 70 percent, from 421,000 to 717,000 persons.
In relative terms, as a percentage of those not in the labor force, discouraged workers nearly doubled from first quarter 2008 to first quarter 2009. But even with this increase, discouraged workers still made up the smallest number of those not in the labor force (see Chart 2).
Discouraged workers in Illinois
The BLS publishes alternative measures of labor underutilization for each of the 50 states but restricts state data to calendar-year and four-quarter averages. As with national data, a monthly survey is used to derive the data.4
Table 3 shows U.S. and Illinois unemployment and U-4 rates over time. One can verify the similarity in annual average movements between the national and state unemployment rates. This similarity exists with discouraged workers as well.
This is not to say that a direct relationship exists, but that patterns of unemployment and labor force deterioration move in a similar direction. As with national data, the recession of 2001 had lasting effects on Illinois through 2002 and 2003. Illinois data in 2007 and 2008 appears to show a similar pattern.
Discouraged workers and “real” unemployment
It has been tempting for some members of the public to interpret alternative measures of labor underutilization as a way of seeing “real” or extra unemployment. One common assumption is that by adding in groups such as discouraged workers to the offi cial unemployment numbers, hidden unemployment would be revealed. But as the preceding tables and charts show, discouraged workers are present in years of economic growth as well as during recessionary periods, increasing in small magnitude when compared with any larger change in the labor force. The tables and charts also
show relatively little difference between the official unemployment rate and the alternative unemployment rate that counts discouraged workers.
A view of the larger economy as seen through the unemployment rate would certainly influence a person’s decision to remain in or leave the labor force. But ultimately, the discouraged worker’s reasons for leaving the labor force are infl uenced not merely by the quantity of jobs, but the quality. No matter if the economy grows or contracts, individual workers could become discouraged depending on whether or not they believe there to be employment for them that satisfi es their own needs or abilities.
In the end, the official unemployment rate provides a legitimate view of the general movement of the labor force in a given time period. National and statewide data show that discouraged workers would have relatively little impact on this measure. Therefore, the fact that discouraged workers are not included in the official unemployment rate does not invalidate the analytical power or usefulness of this measure as a credible tool for reviewing
economic conditions.
Anthony V. Clark is an economist for IDES’ Local Area Unemployment Statistics program.
1While the Bureau of Labor Statistics publishes an alternative measure of labor underutilization known as U-6 (which counts total unemployed, all marginally-attached workers and total workers employed part time for economic reasons as a percent of the labor force plus all marginally-attached workers), this article focuses solely on the discouraged worker.
2For more information, see “Looking Beyond the Official Unemployment Statistics: Alternative Measures of Labor Underutilization” by Richard Reinhold, Illinois Monthly Labor Review, June 2009.
4 It must be noted that because of the small state sample size, monthly state data can be subject to large sampling error. For this reason, annual averages of state and national data will be used
in this section.