The Discouraged Worker Effect

DURING FINANCIAL DOWNTURNS, markets pay close attention to the unemployment rate.

But just as important to an economic recovery is the “discouraged worker effect,” which refers to the factors that lead some unemployed workers to give up their searches altogether, say Mark Kurt, assistant professor of economics, and Steve DeLoach, professor of economics, both of Elon University’s Love School of Business in North Carolina.

Past research shows that the high cost of a job search, a poor likelihood of success, and an expectation of lower wages can drive the discouraged worker effect. Kurt and DeLoach wanted to learn how job search intensity also might be affected by distant macroeconomic shocks such as statewide mass layoffs, stock market fluctuations, and housing values.

The pair examined data from the U.S. Bureau of Labor Statistics’ American Time Use Survey 2003-09, which asked participants to keep diaries of their daily job search activities. Kurt and DeLoach found that a 5 percent decrease in stock prices on the S&P 500 increases job search time by more than 4 minutes in a week. “While this appears small,” the authors write, “recall that the stock market fell by about 50 percent in the first half of 2009.”

Reports of mass layoffs in a person’s state of residence lead to a decrease in search intensity, counteracting the effect of a stock market dip on a job search. A decrease in local housing prices, however, produces only a slight increase in search time, likely because information about housing prices is not so widely available. Ironically, large increases in stock market prices can lead to a decrease in job search intensity among the unemployed—a phenomenon Kurt and DeLoach call “the wealth effect.”

These findings could have implications for policymakers, the authors write. Policymakers should take into account the effect of macroeconomic events on job search intensity as they consider changes in fiscal policy or tax reform.

“Discouraging Workers: Estimating the Impacts of Macroeconomic Shocks on the Search Intensity of the Unemployed” appears in the December 2013 Journal of Labor Research.