Chapter 7
Labour Supply in a Recession (Ehrenberg and Smith)
Introduction
During a recession, economic activity declines, leading to falling output, reduced
business profits, and rising unemployment. These changes significantly affect the
supply of labour in an economy. According to Ehrenberg and Smith, individuals and
households respond differently to recessions depending on their income situation,
expectations, and employment opportunities. The three main concepts used to explain
labour supply behaviour during downturns are the added worker effect, the
discouraged worker effect, and hidden unemployment.
a) Added Worker Effect
The added worker effect refers to the tendency of some family members—usually
secondary earners, such as married women—to enter the labour force when the
main breadwinner loses their job or experiences reduced working hours and income.
Ehrenberg and Smith explain that this behaviour arises because families try to
stabilise household income when the primary earner becomes unemployed. For
example, if a husband loses his job, his wife may decide to look for work to help
maintain the family’s standard of living.
Economically, this effect is driven by the income effect: a decline in non-labour
income (the husband’s wage) makes leisure more expensive relative to work,
encouraging other family members to join the labour force. However, the magnitude of
this effect depends on the availability of jobs, social welfare benefits, and cultural
norms about secondary employment.
b) Discouraged Worker Effect
The discouraged worker effect refers to the opposite response. During a recession,
when job opportunities are scarce and unemployment is high, many people give up
looking for work because they believe they will not find suitable employment.
According to Ehrenberg and Smith, these individuals are counted as out of the
labour force rather than unemployed, since they are not actively seeking work. This
causes the measured labour force participation rate to decline.
The discouraged worker effect arises because of negative expectations and
reduced perceived probability of finding work. The longer a recession lasts, the
stronger this effect becomes, as job search efforts feel futile and potential workers lose
motivation or skills.
c) Hidden Unemployment
Hidden unemployment refers to those individuals who are technically outside the
labour force but who would accept a job if one became available. These people are
“hidden” in the sense that official unemployment statistics do not count them, even
though they represent unused labour resources.
Ehrenberg and Smith note that hidden unemployment often increases during
recessions as many discouraged workers and underemployed individuals (those
working part-time involuntarily) withdraw from the labour force. Thus, the true extent
of joblessness is higher than what official unemployment figures show.
Which Effect Dominates?
According to Ehrenberg and Smith, although both the added worker and discouraged
worker effects operate simultaneously during recessions, empirical evidence
suggests that the discouraged worker effect dominates.
This means that the overall labour force participation rate usually falls in recessions
rather than rising. The reasoning is that the number of people who give up searching
for jobs (discouraged workers) typically exceeds the number of secondary workers who
enter the labour market (added workers). Moreover, limited job availability during
recessions makes it difficult for added workers to find employment, reducing the
practical impact of their entry into the labour force.
Conclusion
In summary, during a recession:
The added worker effect increases labour supply as family members seek to
offset lost income.
The discouraged worker effect decreases labour supply as job seekers
withdraw from the market due to poor prospects.
Hidden unemployment reflects the uncounted potential workers who would
work if conditions improved.
Ehrenberg and Smith conclude that the discouraged worker effect is stronger,
leading to a decline in overall labour force participation during recessions and masking
the full extent of unemployment in the economy.