Workers and Wealth

The Washington Times (Washington, DC), March 10, 2009 | Go to article overview

Workers and Wealth


Byline: Alfred Tella, SPECIAL TO THE WASHINGTON TIMES

A half-million surge in labor force growth last month added almost as much to unemployment as the sharp falloff in jobs. The jobless rate jumped up a half point in February, to 8.1 percent, the second time in the current recession (last May was the first) it rose by such a large amount. Looking back, it's been 23 years since the unemployment rate rose that much in a single month.

Labor force behavior has changed, not surprisingly. A smaller proportion of the jobless are dropping out of the labor force in the current recession than in past recessions, which is pushing up the unemployment rate. If the unemployed this time around had left the work force at a rate consistent with past recessions, the loss in jobs in the past 14 months would have resulted an unemployment rate last month of around 7.5 percent, more than a half point below the actual rate.

It's not incontrovertible that job loss depresses jobseeking. There are forces working in opposite directions to deflate or inflate the size of the labor force over the course of the business cycle, which in turn affects the unemployment rate. Economists call the opposing influences the additional worker effect and the discouraged worker effect.

Households can respond two ways to a loss in jobs. If the main breadwinner becomes unemployed, other members of the household can try to compensate for the loss in wages by also entering the labor force to search for a job. The effect is to raise the labor force participation rate (the additional worker effect).

Conversely, if additional household members do not enter the labor market and the unemployed breadwinner becomes discouraged and drops out of the work force because of the job shortage, the effect is to shrink the labor force (the discouraged worker effect.)

Research has shown that the discouraged worker effect tends to be the dominant cyclical force, i.e., on balance, labor force participation is pro-cyclical, rising and falling with changes in job opportunities. That means in the current recession the proportion of the working-age population in the labor force should be shrinking. And it is, only not by as much as models based on postwar experience would predict. Consequently, the unemployment rate is higher than history would predict. Why?

Three economists at the Federal Reserve Bank of San Francisco have examined the effects of declines in household wealth and credit on labor force entrants. …

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