Thought for the Day: Discouraged Workers?

Tuesday, 10 February 2015, 9:19 am
Column: Keith Rankin

I heard a radio news item a few days ago (Radio NZ, 4 Feb) describing a "robust labour market, with more people 'looking for work'".

This comment represents the disingenuous position of entrenched neoliberal labour market economics. The presumption is that, in periods of weak labour demand (such as recessions), many people decide to take an extended holiday. Thus, in recessions, people drop out of the labour force. They themselves may think that they are unemployed, but they are statistically classified as 'discouraged workers' or 'voluntary unemployed'; meaning they are on an extended vacation. This is one reason why official unemployment statistics always understate the true levels of joblessness in recessions.

The converse applies when the economy moves into an expansionary phase. The unemployment rate barely falls for a couple of years, because as some unemployed people gain some kind of employment, other people (in a 'robust labour market') complete their extended vacations and join the ranks of the unemployed. These are the "more people looking for work", cited above.

Of course these 'discouraged workers' are not really emerging from long holidays. When they lost their jobs – or completed their education – they wanted jobs as much as any other unemployed people. It's just that the reality of their lives meant that many couldn't tick all the boxes required to gain the statistical status of 'unemployed'. One reason –by no means the only reason – is that some jobless people see themselves as the tenth 'cab off the rank' for getting the next available job. The extent of their job-seeking activity rises only when they perceive themselves as having a realistic chance of gaining a job.

In reality unemployment works the opposite way in recessions; it increases because more, not fewer, people are wanting and looking for paid work. (From a statistical point of view, however, many are seen to be only passively looking for paid work; others have yet to make childcare arrangements.)

When one person in a household loses his or her job, then if that person's partner (if not already employed) also becomes an unemployed 'job-seeker'. If the partner is employed but contemplating retirement or pregnancy, then that partner, may reconsider and stay in the labour force. In more extreme cases of hardship, young people who would normally be in education join the ranks of people wanting a job. In the Great Depression many households depended on the meagre wages of their teenage daughters who would otherwise have been in education or simply 'at home'.

There are two effects here: 'substitution effect' and 'income effect'. Most economists emphasise the first effect and neglect the second; further, statistical conventions reflect and reinforce that choice of emphasis.

According to the substitution effect, when market wage rates fall below acceptable levels, more potential workers choose vacation over employment. (Recessions are of course times of falling market-clearing wages.) Leisure and labour are substitute uses of a person's time; falling wages favour leisure over labour.

The income effect, naturally, emphasises income. Thus, when the spendable income of a family falls – maybe due to falling wages but also due to higher rents or mortgage interest rates or redundancy – then the family as a whole reprioritises in favour of a greater commitment to labour. If Alec and Alex are partners, and Alec suffers a loss of income (eg in a recession), then, in order to restore household income to prior levels, both Alec and Alex will seek to work (for pay) more hours than before. If Alex was previously not in the labour force, then s/he now is.

We should stop believing that people respond to falling incomes by taking a holiday.

ENDS

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

Contact Keith Rankin

• Website - Kieth Rankin