Question

Explain how discouraged workers either overstate or understate the unemployment problem.

Answer 1

Owing to discouraged workers part-time workers and unreported legal or unlawful employment, the official unemployment rate, which calculates the proportion of civilian labour force 16 years or older that is not engaged in economic activities but actively finds employment, may be either overstated or understated. Taken together, these calculation concerns indicate that during business-cycle recession, the official unemployment rate is potentially understated and overstated during business-cycle expansions.

Discouraged workers should not include those who, for other reasons, have fallen out of the labour force. There are persons who have returned to school to boost their odds of having jobs. Many women are leaving the workforce because they have been pregnant. Since they have been ill, most people can't function. Although they can genuinely feel overwhelmed as well, they are not counted as overwhelmed employees.

The number of discouraged employees rises at the onset of a recession as the participation rate declines. Some stop working and drop out of the work force after working for six months or more. At that point, both the rate of engagement and the number of employees discouraged are dropping.

Discouraged workers return to the labour force as the economy strengthens. They will have the hardest time seeking a new career, so for a moment, their number will rise. Eventually, as the number of discouraged employees decreases, the participation rate should rise and then stabilise.