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What is the rationale behind government not including discouraged workers who have given up looking for jobs out of frustration given the state of economy?

This under-reports the job market and at the outset looks ridiculous.

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  • $\begingroup$ As in why doesn't the default unemployment rate in the US include discouraged workers? U4 includes discouraged workers. $\endgroup$ – Kent Shikama Sep 23 at 7:02
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    $\begingroup$ And which country are you speaking for? $\endgroup$ – Kent Shikama Sep 23 at 7:04
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    $\begingroup$ @KentShikama: I think the question has broad validity. I don't know of any country that includes "able bodies" who haven't looked for work in a substantial amount of time in the usual unemployment figure. That's not to say it's not reported in another line. There's an ILO definition which limits the time span to 4 weeks. $\endgroup$ – Fizz Sep 23 at 10:36
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The U-3 unemployment rates is the total unemployed, as a percent of the civilian labor force (official unemployment rate). By definition it excludes the discouraged workers, which, as Varun and Kent understand, is not true of all unemployed statistics. I liked what Karabell (2014) says about this statistic:

...[T]here is nothing wrong per se with the [U-3] unemployment figure, provided you know that the definition of employment is a construct, not a counting exercise....to be unemployed, according to the Bureau of Labor Statistics, you have to be in the workforce. To be in the workforce, you have to have a job or be looking for a job. To be looking for a job, you have to answer when surveyed that you have actively sought employment at some point in the past four weeks. If you haven't, you aren't actually unemployed. You are a discouraged worker, are marginally attached to the workforce, and are not counted as part of said workforce. And if you haven't been looking for a year, you're not, statistically speaking, even discouraged. You simply, statistically speaking, don't exist. You do, of course, actually exist (though that is a whole other topic), but not in the statistical universe of employment data.

The result of such methods is that it is possible, and not just theoretically, for the unemployment rate to drop not because more jobs were created or more people were hired but simply because more people gave up looking for work and dropped out of the workforce. That is, in fact, What happened in the United States and swaths of Europe after 2009, though in America, there were also real job gains in 2010 and after. Nonetheless, the unemployment rate, which receives so much public scrutiny, went down in part not because the economic system was creating so many new jobs but because it was failing to do just that. To be fair, the BLS keeps multiple unemployment statistics and different unemployment rates, including ones that include underemployed, marginally attached, and part-time workers, but there is only one headline number. That is what the BLS points to in its monthly release; that is what the media pick up; and the other numbers are at best footnotes.

The Leading Indicators: A SHort History of the Numbers That Rule Our World Zachary Karabell (2014)

Therefore, if your question is why does U-3 exclude discouraged workers, the answer is that's an essential part of the definition of discouraged.

If your question is why did they define U-3 this way in the first place, I am not sure. I suspect the following. The definition of the labor force, which is workers and those actively looking for work or waiting to be recalled to work. Detached and marginally attached workers are not in the labor force. Once you defined the labor force, a natural question is what fraction of the labor force is not working, and that statistic is U-3.

If your question is why is this statistic more widely discussed than other economic statistics, the answer may simply be that it is older. The U-3 statistic goes back to 1948 while U-4, U-5, and U-6 start in 1994. People may be used to talking about the better established statistic and enjoy the longer time series, and see insufficient benefit to switching to the newer statistics, despite the benefits. A sort of Dvorak vs. Qwerty keyboard issue for economic statistics.

In a way, this is like an issue of GDP measurement. Home production is not in GDP and Robert Barro has argued that investment is double counted in GDP. If you want to use GDP as a measure of something else, these may be big problems and other measures may serve better. However, if you want to compare GDP across countries or time, these issues matter less than having something useful and consistent to compare them with. Commenter ABC at Marginal revolution has a nice quote about this:

The algebra is fine as it is, but I take strong issue with the idea that GDP "mismeasures" something. As any decent intro macro course will tells its students, "GDP is not a measure of welfare." Indeed, the Kuznets quotes that Barro points to are exactly of this nature; we have this high profile GDP number, but it doesn't do what you want it to do - or at least not ALL the things you want it to.

What Barro does here is construct a new measure - present discounted value of consumption - and shown how it relates to GDP (and GDP's present discounted value). In addition, he provides a capital income / labor income decomposition for both measures (GDP having such an exact decomposition because of constant returns to scale, Euler's identity for homogenous functions, and marginal-value input prices). He then says present discounted value of consumption, and its associated decompositions, are "right" while the other the construction GDP is "wrong" and thus gives "misstated" decompositions. Of course, "right/wrong" and "correct/incorrect" begs the question - right about WHAT? Correct for WHAT?

Barro says that in present discounted value terms GDP "double counts" investment. The "double counting" is only relative to how things are calculated for the present discounted value of consumption. This just reflects the fact that GDP counts production, while consumption only counts consumption.

ABC's comment on Marginal Revolution Post: Robert Barro says we double-count investment

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