The Shadow Labour Supply And Zero Marginal Product Workers

The Shadow Labour Supply consists of people who are not in the labour force i.e. not actively searching for a job, but still want a job.

This paper by Davig and Mustre-del-Rio explores the flows between the shadow labour supply and the labour market. It is very interesting because a significant rise in discouraged workers is not a good thing by any measure.

From 2008 to 2013, the estimated size of the shadow labour supply has risen from 4.5 million to almost 6.8 million people in the United States.

The shadow labor supply, consisting of individuals who are not actively searching for a job but would like to work, has grown considerably in recent years. Although this group has characteristics similar to those who are officially counted as unemployed, individuals in this group flow into employment at a lower rate. Still, they become employed at a much higher rate than those who indicate they do not want a job. Compared with that group, individuals in the shadow labor force are also more likely to start looking for a job.

Nevertheless, despite the swelling size of the shadow labor supply, a return of these individuals to the labor force in numbers that would considerably affect the unemployment rate appears unlikely. Variation in their job search behavior may influence the future path of the unemployment rate modestly, but not greatly. Although individuals in the shadow labor force do flow back into unemployment, the peak in their return to the labor force typically occurs in the first few post-recession years. The recent, post-recession peak of their flow back into unemployment has already occurred, in mid-2010. While another surge back into the labor force by individuals in the shadow labor supply is possible, historical evidence suggests it is unlikely. Broader variation in flows between the different non-employment categories, however, can have a more substantial impact on the unemployment rate over the next few years.

Arnold Kling speculates that these people realise that they are currently zero marginal product workers, so they might as well stop actively searching for work to preserve their sanity. He adds that people who are still looking for work unsuccessfully “didn’t get the memo”.

It isn’t a particularly nice conclusion, but this is economics not sociology. When you add in the reality that when nominal wages can’t be cut payrolls will, perhaps a lot of people are completely unwilling to re-enter the labour force at a lower wage and would rather go fishing than take a job at a lower wage rate.

I’m looking forward to whatever he writes about the topic when he gets back to it. His upcoming macroeconomics book should be really interesting.