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The Discouraged Worker Distortion
Suppose we start with 100 people in the labor force. 95 are working and 5 are unemployed but actively looking.
- L = 100 and U=5, so
unemployment rate = 5%
Now suppose one of the 5 unemployed becomes discouraged and quits looking. We now have
- L = 99 and U=4, so
unemployment rate= 4.04%
Of course it works in reverse, too. If discouraged workers hear news that makes them think they might get work and then start to actively look, the unemployment rate will get worse (rise) – even though the number of actually employed people is unchanged.
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