Question

According to the discouraged worker effect, the official unemployment rate in bad times always understates the real situation. Provide a short answer explaining why that is the case.

Answer 1

The official unemployment rate does not include discouraged workers. These are the adults who have been looking for jobs in the past 12 months at some point, but not in the four weeks before their monthly household survey is conducted by the Bureau of Labor Statistics (BLS). That separates them is that they are said to be "discouraged" because (at least temporarily) they have given up on finding work.

A worker who is depressed is an example of a worker slightly attached. Other marginally attached workers aren't in the workforce because they haven't been looking for work for different reasons in the past month (even though they've been looking for a job in the past year). In other words, you would be a slightly attached worker in July if you were looking for a job on May 1 but took a break in June to look after a sick parent or child. But you wouldn't be known as unemployed. Ignoring marginally attached employees at the official unemployment rate may make it appear as if there are less unemployed.

Another problem with the official unemployment rate is that it does not take into account the quality of the workforce. If people have part-time or temporary jobs, they are considered to be employed. They are also considered to be employed if they have low-skilled jobs they just took to put food on the table. The unemployment rate paints a distorted picture of where the labor market stands without addressing the issue of underemployment. Ultimately it could be problematic to have too many workers who are unhappy with their jobs or who do not reach their full potential. For a worker with a low-paid, part-time gig, paying off debt or saving for retirement can be challenging.