Discouraged worker effect & added worker effect
Since the incidence of discouraged workers is highest when the expectation of being able to successfully enter employment is lowest, it follows that this problem is at its worst in deprived areas because job opportunities are lowest there, and the labor force is least equipped to gain work.
In these deprived areas, the persistent nature of unemployed potential workers leans towards a structural problem in the labor market, i.e. structural unemployment, but there is also a strong cyclical component.
There are several groups of people who are known to face particular 'barriers to work', and these groups are over-represented in deprived areas. They include:
- Those with low or no skills
- Those with disabilities
- The over 50s
- Lone parents
- Ethnic minorities
The extra barriers that these groups face, whether perceived or real, does lead to a higher incidence of discouraged workers. For more details on this, see my article about Barriers to Work.
The strong association with the business-cycle means that the incidence of discouraged workers adds to cyclical unemployment numbers, and there are calls in some western countries for estimates of the effect to be added to the official unemployment numbers. So far those calls have gone unheeded, and there is little political support for such inclusion since it would result in less faltering unemployment statistics overall.
Inclusion of discouraged workers in the official unemployment statistics would flow in the opposite direction of pretty much all amendments in recent decades, which by curious coincidence always seem to favor the government of the day with lower numbers of unemployed workers reported.
The 'added worker effect' in the study by Xiadong Gong (see link below) refers to a situation in which a woman's husband becomes unemployed, and her reaction to that in terms of entering the labor force. The economic rationale here would be to expect that the overall decline in family income following a spouse's job loss, would be to increase the labor force participation rate of other family members.
The study confirms that the added worker effect does indeed increase labor force participation by married women, but that it primarily results from already-employed women increasing the hours that they work rather than unemployed women successfully entering employment after their spouses become unemployed.
The findings also support the premise that, when spouses lose their jobs during an economic downturn, it is especially unlikely that women will be successful in entering employment themselves because of the discouraged worker effect, meaning that an increased proportion of them do not even attempt to enter employment during tough labor market conditions.
The Labor Force Participation Rate
The study by Dagsvik Et. al (see link below) estimates that the discouraged worker effect is very substantial when the job market is tight and the business cycle is in recession. They calculate that, on average, one-third of the married or cohabiting women in their study who had withdrawn from labor market participation had done so because of the discouraged worker effect.
They estimate that, from the business-cycle low point of 1988-1990, about 7.6% of the married or cohabiting female population were discouraged. That compares with just 1.6% during the 2006-2008 business-cycle peak.
The same study found that the corresponding figures for the labor force participation rate ranged from just 0.81 in 1988-1990 to 0.95 in 2006-2008.