Why Everyone Suffers When Job Seekers Give Up

Among the surprises in last month's job report was the downward slide in the unemployment rate from 9.7 percent to 9.5 percent. Most of the time, high unemployment rates are bad and low unemployment rates are better. But when the percentage of out-of-work Americans dipped in June, it was driven largely by a 652,000 drop in the labor force.

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Some job seekers might see this, on its face, as a good thing—fewer labor force participants means less competition for jobs. The truth is much less helpful. When able workers drop out of the job market, their households make do with less income, and their long-term financial health may be threatened, as savings are depleted. The aggregate economy suffers, too, as it chugs its way out of recession—it loses their contributions as workers and their buying power as consumers.

The number of discouraged workers has skyrocketed over the past year, as job-cutting has slowed but hiring has remained sluggish. "Discouraged" is a Labor Department label for unemployed workers who have looked for jobs over the past year but not in the past month because they've lost hope of finding anything. Last month, there were 1.2 million discouraged workers, some 52 percent more than the 793,000 discouraged workers in June 2009. Last month, the number of discouraged male workers was the same as the total number of discouraged workers—male and female—in the same month a year ago.

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The growth in discouraged workers is clearly correlated with the high numbers of long-term unemployed—as people who have spent a year or two looking for work unsuccessfully begin to lose the will to keep searching. With five job seekers for every job opening, and some jobs not likely ever returning, the search has been incredibly difficult for many. This is worrying, says Sung Won Sohn, an economist at Smith School of Business and Economics. "If you look at the total unemployment, about 50 percent are long-term unemployed ... and I suspect that a lot of these people are just dropping out of the labor force, saying 'this is just a waste of time,'" Sohn says. "It's not only an economic problem but a social problem as well. Many of these people are very able—they're in their forties, fifties, they still have quite a few years left in them."

Many workers who were encouraged to keep searching for jobs through the requirements of unemployment benefits have lost that incentive as Congress has allowed federal benefits to expire. "An important argument for extending [unemployment] benefits is that UI keeps people looking for work so as to head off their potentially permanent withdrawal from the labor force," says David Autor, a labor economist at MIT.

The negative effects of workers dropping out extend beyond the workers themselves. "You have fewer family members working, which means families have less income," says Heather Boushey, senior economist at the Center for American Progress. When households have less income for prolonged periods, they may rip through their retirement savings, or be unable to make mortgage or rent payments. The stress and ill-health associated with long-term unemployment gets passed on to other household members, particularly children. With stimulus-backed COBRA subsidies going away, some households may be going without healthcare coverage.

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The broader economy and society suffers when workers become discouraged. Younger workers, blacks, and Hispanics tend to be overrepresented in the discouraged-worker category, according to the Labor Department. For one thing, there's a loss of human capital, Boushey says. "We have a relatively highly educated labor force. Many of the folks who are dropping out do have an education and that's an investment that we as a society make, and in many ways subsidize, through the public school system and then through community colleges and public universities," Boushey says. "For that investment to really pay off, you want people to participate to the extent that they can, and want to, in the labor market."

Discouraged workers can't help the economy move toward recovery, as they generally can't contribute to the aggregate demand without generating income, paying much in taxes, or consuming much, Autor says. Over the longer term, some discouraged workers will never return to the labor force and may depend on financial support from family members, or public programs such as federal disability benefits or Medicaid. "In addition to the losses these individuals suffer as a result of not remaining active in the labor market, their withdrawal is also an expensive proposition for the public," Autor says. "Prime age adults who exit the labor force permanently will generally receive considerably more in public benefits and transfer income than they will pay in taxes. Thus, in net, their withdrawal increases the dependency ratio, that is the ratio of non-workers to workers."

The discouraged workers of this recession may, by and large, be short-termers, jumping back into the job market as soon as hiring really improves. Others may make new plans. Diane Lim Rogers, chief economist at the Concord Coalition and blogger at economistmom.com, says that some of workers' discouragement right now is "probably just short term and will recover, but some workers have probably had enough of this downturn and their bad labor market experiences that they will start pursuing other longer-term plans," such as going back to school.

Retraining programs will likely be key to getting discouraged workers back into the workforce. "What's worrying is you have this sea of unemployed people who seem to not have the right skill sets for where jobs may be being created in this economy," says Joshua Shapiro, chief U.S. economist at MFR, an economic consulting firm in New York.