Positive Expectations?

Total Discouraged Workers

[Ed. I had to write this for class, and since I have an exam today I thought I'd post this instead of writing something else.]

Unemployment remains an enigma. That in 2012 the unemployment rate fell by less than half a percentage point may be concerning. Further, 7.9 percent of the labor force remains without jobs, and it has been like this since October 2012. I, however, remain an optimist, basing my case on the discouraged workers data published in the recent Bureau of Labor Statistics (BLS) report.

Discouraged workers are a subset of what economists refer to as people “marginally attached to the labor force.” The latter, broader category includes all those who are willing and able to work, but have not been actively seeking employment for the past four weeks for whatever reason. Discouraged workers are a narrower range of elements: unemployed individuals who are pessimistic about the employment outlook. They aren’t actively seeking work because they don’t think there’s any available, perceiving their time as being better spent in alternative activities. Many think that the most basic unemployment rate (U-3) ought to reflect the discouraged, believing that the discouraged workers data makes the unemployment situation worse than typically reported. But, there’s reason to believe the opposite.

Counter intuitively, the U-3 statistic reflects these improvements by making conditions seem worse. The latest BLS report shows that unemployment remains unchanged at 7.9 percent, despite an increase in total nonfarm payroll employment. If the private sector has contributed to net job growth, how can the unemployment rate remain the same? The answer is that previously discouraged workers have begun actively seeking work, re-entering the U-3 unemployment measurement.

The graph above shows two lines. The thick blue line tracks monthly changes in the total number of discouraged workers. The thinner black line is a “rolling average” trend line, and is useful for illustrating trends that may be hidden by the short-term volatility of the data (which may be exaggerated, since this data is not “seasonally adjusted,” which manipulates figures to place them out of specific contingent contexts). Note that, on average, the total number of discouraged workers has fallen since its mid-2010 peak. Since the decision to become discouraged essentially rides on one’s expectations of employability, that less people are discouraged suggests that expectations for the labor market are picking up. The unemployed themselves think the employment situation is improving.

In this economy, growing confidence amongst the unemployed is certainly a good sign.