Accounting for Discouraged Workers in the Unemployment Rate

A few weeks ago, we examined facts about discouraged workers, which have received increasing attention in the past few years as the unemployment rate has decreased. Today, we’ll look at an alternative measure of unemployment which counts some discouraged workers, but not all.

Discouraged workers are defined as those who want a job but are not actively searching for one because they believe there are no jobs available for them. These workers are not counted as unemployed or as part of the labor force. They are, however, included in the Bureau of Labor Statistics’ U-4 rate. More specifically:

• The official unemployment rate is defined as unemployed workers as a percent of the labor force.
• The U-4 rate is defined as unemployed workers plus discouraged workers as a percent of the labor force plus discouraged workers.

These two measures constitute an all-or-nothing approach regarding discouraged workers and measuring unemployment: The unemployment rate counts no discouraged workers, while the U-4 rate counts all discouraged workers.

In an Economic Synopses essay, Vice President and Economist B. Ravikumar and Technical Research Associate Lin Shao, both with the St. Louis Fed, construct a measure of “potential labor market participants” based on discouraged workers who might be expected to re-enter the workforce. Since December 2007, about 40 percent of discouraged workers, on average, re-enter the workforce every month. Ravikumar and Shao then calculate a new unemployment rate including these potential labor market participants.

This new measure results in an unemployment rate that is only slightly higher than the official rate. For example, the official unemployment rate in October 2009 was 10 percent, while Ravikumar and Shao’s rate was 10.2 percent. The U-4 rate was 10.5 percent.

The new measure also follows the same trend as the official unemployment rate: Both rates increased from December 2007 to the fourth quarter of 2009 and have been declining ever since.

• On the Economy: Discouraged Workers: What Do We Know?
• On the Economy: The Rise and Fall of Labor Force Participation in the U.S.
• Economic Synopses: Accounting for Discouraged Workers in the Unemployment Rate