Discouraged workers are people of working age who stop looking for work. They usually stop looking because they are discouraged after not finding a job. Because they are not actively looking for work, these people are excluded from the labor force and are therefore not counted in the official unemployment rate.
Usually, the presence of discouraged workers keeps the overall unemployment rate high. When the economy recovers and then expands, and more jobs are available, they generally try to return to the labor force. Once they are still actively looking for work again, until they find a position, they fall into unemployment.
Reasons for discouraged workers
A discouraged worker has left the unemployment rate calculation. That’s because they are not working or actively looking for work.
They are discouraged for several reasons. According to the Bureau of Labor Statistics in the United States, the five main reasons for discouragement are as follows:
- Workers believe that there are no jobs available for them. Structural changes in the economy, for example, along with a technological revolution, can eliminate certain types of work.
- Workers cannot find work due to low labor demand. This situation usually occurs during a recession or depression.
- Lack of skills, training, or experience so that their skills do not match the demands of employers.
- Employers see workers too young or too old
- Various types of discrimination based on age, race, sex, religion, sexual orientation, and disability
Impact of discouraged workers
Desperate workers make the official unemployment rate inaccurate because it only counts the labor force. Because they are no longer looking for a job, they are not counted as an active labor force. It means that official unemployment rate calculations exclude them because they only take into account the number of the active labor force.
The unemployment rate should increase during a severe recession because many people are discouraged and stop looking for work. However, because they are excluded from the active labor force, the unemployment rate is still low even during the recession.
Let us retell the unemployment rate formula.
Unemployment rate = Number of unemployed workers / Total labor force
When many workers work and are discouraged, they are no longer categorized as unemployed and also the labor force. Therefore, the numerator and denominator are both reduced. As a result, the current unemployment rate tends to be unchanged compared to before, even though employment worsens due to the recession.
Therefore, we must look at the unemployment rate data with the data of the labor force participation rate. The aim is to determine whether the decline in the unemployment rate is actually caused by improved economic growth or because of an increase in the number of workers who are discouraged.
Short-term fluctuations in participation ratios can occur due to changes in the number of desperate workers. The level of participation tends to increase when the economy expands and decreases during a recession. Those who stopped looking for work during the recession were motivated to look for work again after the expansion took place because they believed the prospect of job availability improved.
To anticipate such misleading, in the United States, the Bureau of Labor Statistics also released the U-4 level. This statistic accommodates unemployed workers plus discouraged workers as a percent of the labor force plus discouraged workers.
Implications in the business cycle
The presence of unemployed people is discouraged, making the unemployment rate lag behind the business cycle.
At the start of the expansion, when the prospect of hiring began to increase, the number of discouraged workers reentering the labor force was more significant than the number recruited immediately. It causes the unemployment rate to remain high despite increasing employment.
Conversely, when the economy shows signs of recession, the unemployment rate remains low even though there are many unemployed who are discouraged.
