Thursday, January 24, 2008

Discouraged Workers and Unemployment...

According to the text, if discouraged workers are not counted as unemployed, the unemployment rate will be understated during recessions. Why is this? - Jane

The unemployment rate = 100* unemployment / (unemployment + employment). An increase in the number of discouraged workers decreases both the numerator and the denominator by the same amount. But because the numerator (unemployment) is much smaller than the denominator (unemployment + employment), in percent terms the numerator declines by more. Hence the measured unemployment rate falls.


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