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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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January 21, 2010


It's jobs, not discouraged workers

Though they represent only a small fraction of the overall labor force (roughly 0.3 percent on average from 1994 through 2007), discouraged workers have received a good deal of attention lately (here, here, and here, for example) because of the dramatic increase in their numbers during the current recession.

The term "discouraged workers" refers to individuals who are out of the labor force and respond to Bureau of Labor Statistics surveys stating that they are not looking for work because they believe no work is available, could not find work, lack necessary schooling or training, or face discrimination based on age or other factors.

The run-up in the number of discouraged workers is of particular concern to some because of the possibility that all these people (an additional 522,000 since the beginning of the recession) will come flooding back into the labor market, driving the unemployment rate even higher as soon as perceptions of job prospects begin to improve.

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Say these discouraged workers were to start re-entering the labor force in 2010. How many jobs would need to be created each month to absorb them? While there is a danger in taking stocks and trying to translate them into flows, this exercise does provide some framework with which to talk about the impact discouraged workers re-entering the workforce might have on the unemployment rate going forward.

In order to make that calculation, we need to make some assumptions about how quickly the discouraged workers might re-enter the labor market. Using the previous recession and recovery as a guide, discouraged workers might return to the labor market at a slightly slower rate than when they exited it. From the fourth quarter of 2001 through the first quarter of 2005 (the previous peak in the number of discouraged workers), the number of discouraged workers increased at an average quarterly rate of 3.4 percent. From the first quarter of 2005 through fourth quarter of 2007, the number of discouraged workers decreased at an average quarterly rate of about 2.7 percent.

Applying this same ratio (3.4 percent/2.7 percent) to the 19 percent average quarterly run-up between the fourth quarter of 2007 through the fourth quarter of 2009, we could see an average quarterly decline in discouraged workers of about 15 percent. This number suggests that, if we are at a new peak of discouraged workers, we could see 414,000 discouraged workers re-entering the work force in 2010, which would represent an average of around 34,500 workers per month. This number represents 0.02 percent of the U.S. labor force in December 2009. If these discouraged workers were the only workers joining the labor force, the economy would need to create roughly 30,000 jobs each month to keep the unemployment rate the same (10 percent).1

How quickly the discouraged workers will re-enter the labor force, holding everything else constant, is not necessarily the most important question. A more significant question is how quickly the overall labor force will grow. Employment would need to grow at the same rate as the labor force in order for the unemployment rate to remain at 10 percent, which amounts to roughly 91,000 jobs per month if we use the average annual growth rate of the labor force during the three years following the 2001 recession, which was 0.84 percent.

Bottom line: While not insignificant, the number of discouraged workers that can be expected to re-enter the labor market once job prospects turn around is only a small piece of the puzzle. More focus should instead be placed on the larger issue of job creation.

By Julie Hotchkiss, research economist and policy adviser, and Laurel Graefe, senior economic research analyst, both of the Atlanta Fed's research department


Footnote: 30,000 represents 0.02 percent growth in jobs that will be needed to absorb the 0.02 percent growth in the labor force that is reflected in the 34,500 number: (131 million)*(0.0002)=26,200, or, roughly 30,000

January 21, 2010 in Labor Markets | Permalink

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Comments

i cannot believe that the concern would be expressed as "all these people will come flooding back into the labor market, driving the unemployment rate even higher as soon as perceptions of job prospects begin to improve."

is the nominal unemployment rate all that concerns you people?

Posted by: rjs | January 22, 2010 at 04:24 AM

So what if discouraged workers coming back affect the unemployment NUMBER? It's just a reported statistic.

More important is what, if any, effect would their returning to the job market have on the ECONOMY. My instinct is to say "not much", although they might introduce additional competition for jobs and hence some slight downward wage pressure.

Posted by: John | January 23, 2010 at 07:42 AM

Agree with rjs!

The matter is that people have no jobs. It does not matter if they are "still looking" or "discouraged". Much more than 10% of Americans are unemployed. Period.

Posted by: Me | January 23, 2010 at 01:06 PM

If we take the stats and assumptions as fact, then your last question is the most important.

Current fiscal policy and possibly fed policy will not stimulate job creation.

Fiscally, we are looking at high spending, and higher taxes.

The Fed has interest rates at 0, with banks borrowing at 0 and re-investing in risk free treasuries at 3%. Banks are risk averse, and are not lending money to the overall economy.

Posted by: Jeff | January 24, 2010 at 05:46 PM

It's EMRATIO that you should be looking at, if you want to focus on "Jobs". That, and the distribution of income between corporate profits, proprietors' income, and workers' income (Page 21 of the National Economic Trends report).

Corporate earnings reports for the past few quarters tend to show corporations maintaing stable earnings despite revenue declines. Earnings are being sustained by cutting "costs"... procurements and wage-related expenses are being held down. But neither of those leaves workers (or vendors) with cash to spend. While this practice makes sense at the micro level, given the incentives of the individual corporations, at the macro level is a vicious cycle -- unsustainable economic suicide for the nation as a whole -- because it is individual spending that drives the economy.

We cannot borrow our way to prosperity, and neither can we cost-cut our way to prosperity. We have to get back to producing our way to prosperity, not with "credit" and "debt", but with real capital.

Now, the issue with job creation is partly about costs of employment - tax rates, the badly-timed raise in the minimum wage, and so on - but it is much more about *complexity*, *uncertainty* about costs, and about the business climate. It is simply too hard to start a new business right now, and the risks of rising costs and/or radical changes in the economic climate make it difficult for entrepreneurs to justify taking the plunge. There are simply too many trial balloons and bad policy ideas being floated as serious proposals.

Also, many sectors of the economy (housing and commercial real estate) are so massively overbuilt that demand will not outstrip existing supply for a decade in many areas, even with normal growth.

So, the incentives are weak and the risks high. Would YOU be willing to go out and risk your own capital (both time and money) to start a new business in this "economic weather"?

The economy will not improve until we stop coddling the banksters, stop tolerating financial waste, fraud and abuse, and start giving entrepreneurs a stable, simple business-creation platform upon which to build the next wave of the American Dream...

Posted by: Wisdom Speaker | January 25, 2010 at 03:31 PM

"It is simply too hard to start a new business right now, and the risks of rising costs and/or radical changes in the economic climate make it difficult for entrepreneurs to justify taking the plunge."

I'm not so sure. I think access to capital is a real headwind for small and even larger firms. The ATL fed has talked about this and I believe they are correct here. What I think, or am afraid we need is another Henry Ford, or Bill Gates. We've got to find some way to fire up the machine to put these people back to work. While the Fed has it's tricks, it isn't the end all be all of employment or the economy.

I'd like to see in a different world, if such a thing were possible, what deregulated Power would look like. Not California style, but similar to the 1984 break up of AT&T. I reckon done right this could create millions of new jobs. But such a thing cannot be tested. This is the sort of 'firing' up of the machine that may be needed if the current system can't absorb all the inputs.

Posted by: FormerSSResident | January 25, 2010 at 10:02 PM

Agree with Me: Not working is not working.

Or to those more concerned about the macro effects: not looking -> not working -> not earning -> not spending

Posted by: Paul | January 26, 2010 at 08:05 PM

I wonder if Ms. Hotchkiss would agree with Bill Gross' "New Normal" theory? I also wonder what Bill Gross thinks about the current level of discouraged workers and if it is temporary or a component of his "New Normal"?

Posted by: SLS | January 28, 2010 at 12:59 AM

Great post. I enjoyed the column and agreed with everything, until the very end.

I was surprised to see you use labor force growth (which is itself a function of participation) instead of working age population growth. I find that using the later implies much larger net job growth to maintain the unemployment rate. Using the latter also allows us to use population estimates from the census (very accurate in the near-term) instead of extrapolating growth rates from previous recoveries.

Nonetheless, your point remains: discouraged workers are not themselves an additional problem. Jobs are the problem.

Posted by: The Secret Economist | February 01, 2010 at 06:46 AM

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