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November 18, 1977

Discouraged
The President this week unveiled the
latest version of the Humphrey-Hawkins bill, setting the magic 4-percent
jobless-rate figure as the goal to be
reached within the next five years.
This action seems certain to raise again
the question of what level of unemployment is compatible with a regime of stable prices and full utilization
of resources. Is it 4 percent, the figure
reached in the mid-1950's era of full
employment and stable prices? Or a
shade below 5 percent, as the Ford
Council of Economic Advisers claimed
on the basis of all the changes in laborforce structure that have taken place
over the past several decades? Or is it
close to today's actual figure of 7
percent, as former CEA Chairman
Herbert Stein recently claimed on the
basis of the shortages that are now
cropping up in certain job categories?
This array of figures suggests that the
full-employment jobless rate can be a
rather mushy concept. Indeed, any attempt to measure joblessness can be a
complex and difficult task. To take an
important case in point, consider the
problem of discouraged'" workersthe large numbers of hidden unemployed who want work but don't
actively look for a job because of a
belief that their search would be in
vain.
Some observers argue that the number of discouraged workers should be
added to the recorded unemployed
to provide a clearer picture of labor-

market conditions. About one million
people are now considered to be in
this category, so including them with
the recorded jobless would raise the
official unemployment rate from
roughly 7 percent to about 8 percent
of the labor force. Because that figure
would indicate a substantial level of unused resources, many analysts argue
the need for stimulative measures
(such as a major tax cut) to raise the
level of aggregate demand and thus
create jobs for more workers, including jobs for those now too discouraged to look for work.

Offsetting fadors
The procedure of adding the number
of discouraged workers to the reported unemployed may dramatize
the problem of unemployment, but
how accurate a picture does it provide of the actual situation in the labor
market? The picture becomes
clouded' because of different forces
operating on the labor market, especially in periods of a worsening economy. There is of course the "'discouraged worker'" effect - the tendency
for some workers not to enter (or reenter) the market, and for others to •
leave the market, when job search appears too costly and difficult. But there
is also the
worker'" effectthe tendency of some individuals to
enter the labor market or to remain in
it longer than they would prefer, often
because of economic necessity when
other family members become
unemployed.

(continued on page 2)

In this situation, the observed labor
force is affected by the net flow of
workers - the added workers who
temporarily enlarge the labor force
and the discouraged workers who reduce its size. An argument thus could
be made against adding the discouraged workers to the observed labor
force without at the same time
subtracting the
workers.
Otherwise, the actual size of the labor
force could be exaggerated, thus
confusing the measurement of
unemployment.

It should be noted, however, that
large numbers of potential workers
have remained discouraged even during periods of over-full employment,
when inflationary pressures mounted
amid substantial shortages of trained
workers. In 1967-69, for example,
there were 657,000 discouraged
workers on the average, and the number was quite similar (679,000) in 1973,
another year of labor-market tightness. In contrast, in the 1975 recession
year, the number of discouraged
workers increased to 1,082,000.

How mallllYdiscolUlraged?
A separate question concerns the
number of discouraged workers who
would remain outside the labor force
even under conditions of full employment. Some analysts argue that this
problem of hidden unemployment
could be eliminated or greatly reduced if measures were taken to
stimulate aggregate demand. In this
way, an adequate number of jobs
could be created for those who wish
to work but have sought vainly for
jobs. According to this line of thought,
the hidden unemployed represent a
sizable reserve of unused resources,
which a stimulative-demand policy
could help eliminate without inciting
undue. inflationary pressures.

These numbers show that the discouraged-worker problem increases
substantially during periods of weak
labor markets. However, roughly twothirds of such workers remain discouraged even under conditions of full
employment, when any efforts to
stimulate overall demand would be
most likely to aggravate inflationary
pressures. Even so, if the past is any
indication of future behavior, the current number of discouraged workers
could be reduced by about 300,000 if
the economy were operating closer to
the full-employment level.

N

2

What type of policy?
The bulk of the hidden unemployed
appear to be unaffected by cyclical

changes in aggregate demand. Some
are unemployed for seasonal or
tionar reasons - but their short-term
spells of joblessness are not generally
matters of policy concern. Many of
these workers enter or re-enter the labor force at will, and find jobs within
reasonable periods of time. Indeed,
the survey responses made to the Bureau of Labor Statistics indicate that
most such workers intend to enter the
job market within a short period of
time.

At the same time, a significant portion
of the hidden unemployed are jobless
for structural reasons- for example,
individuals who were formerly employed in declining industries or in
declining areas of the country. These
people may not be helped to any extent by broad policy measures designed to expand the total number of
jobs in the economy. Instead, specific
tailor-made programs may be needed
to create productive jobs for such
structurally-unemployed individuals.
Rose I'AcE!haUar!!

Thousands
1200

DISCOURAGED WORKERS

900
600
300

o 1967

*

1969

1971

1973

periods.
Source: Bureau of Labor Statistics

3

1975

1977(1st.
half)

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'me:) 'O:lSpueJ:I ueS
(;SL 'ON
OI Vd
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:{}

BANKINGDATA-TWELFTH fEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
Selected Assets and liabilities
Large Commercial Banks

Loans(gross,adjusted) and investments*
Loans(gross,adjusted)-total
Securityloans
Commercialand industrial
Realestate
Consumerinstalment
U.s. Treasurysecurities
Other securities
Deposits(lesscash items)-total*
Demand deposits (adjusted)
U.s, Government deposits
Time deposits-total*
Statesand political subdivisions
Savingsdeposits
Other time deposits:j:
Largenegotiable CD's

Amount
Outstanding

11/2/77

10126/77

103,322
80,432
1,957
24,470
26,288
13,895
8,251
14,639
99,000
28,796
235
68,075
5,281
31,667
29,082
10,913

+ 1,660
+ 1,114
12
+
+ 416
+ 76
66
+
+ 455
91
+
+ 220
29
+
- 50
+ 230
- 52
62
+ 296
+ 276'

Changefrom
year ago
Dollar
Percent

Change
from

-

+ 12,571
+ 11,022
'+
349
+ 1,921
+ 5,242
+ 2,001
512
+ 2,061
+ 8,924
+ 3,416
254
+ 5,871
407
+
+ 2,963
+ 2,613
545
+

-

Weekended

Weekended

11/2/77

Weekly Averages
of Daily figures

13.85
15.88
21.70
8,52
+ 24.91
+ 16.82
- 5.84
+ 16.39
9.91
+
+ 13.46
- 51.94
9.44
+
8.35
+
+ 10.32
9,87
+
5.26
+

+
+
+
+

10126/77

comparable
year-agoperiod

Member Bank Reserve Position

Excess
Reserves( )/Deficiency (-)
+
Borrowings
Net free(+)/Net borrowed (-)
federal funds-Seven

0
228
228

+
+

26
9
17

+

57
0
57

Large Banks

Interbankfederal fund transactions
Net purchases )/Net sales(
(+
-)
Transactions
with U.s. security dealers
Net loans(+ )/Net borrowings (-)

+ 1,430
+

280

+ 1,315
+

416

309

+

81

*Includesitemsnot shown separately,:j:lndividuals,
partnerships
and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author ..••
Information on this and other pUblications can be obtained by calling or writing the Public Information
Section, federal Reserve Bank of San francisco, P.O. Box 7702, San francisco 94120. Phone (415) 544-2184.