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Labour Supply in a High Unemployment Economy: Conclusions and Policy Implications

To conclude, assuming that the job search behaviour is endogenous to labour market conditions then the ILO guidelines of defining the labour force status of the non-employed individuals may be inappropriate in high unemployment economies. The discouragement effect among the non-employed workers in these economies is more pronounced. Relaxing the ILO guidelines or reporting both narrow and broad unemployment rate help to provide estimates of the true extent of unemployment.
In this paper, we investigated the determinants of labour supply in Kosova. Our analyses suggested that the standard neoclassical framework of analysing individuals’ labour market behaviour might be inappropriate in economies such as Kosova due to demand-side restrictions preventing individuals from making choices compatible with the utility maximisation assumption. Demand-side restrictions push large numbers of Kosovars into inactivity (i.e. the discouraged workers) that would otherwise be searching for jobs. Our analysis suggested that ignoring this aspect of the labour market may produce misleading estimates and therefore misinform policy choices that could have lasting consequences.
Our findings confirm those found elsewhere, that individuals with higher potential wages (as proxied by the education level) are more likely to supply labour to the market and that this effect is stronger for urban residents. For females, being married lowers the likelihood of participation, while for males it increases it. We find some weak evidence that having a household member abroad (as a proxy for remittances) lowers females’ labour supply though for males this effect is insignificant. Females’ labour supply is negatively affected by household labour income, while for males (as expected) this effect is not significant. We find significant regional differences in the labour supply of females, but not for males suggesting that that females are less mobile and unable to take advantage of more distant employment opportunities.
The possible presence of discouraged workers amongst the non-employed is frequently overlooked in the labour supply literature. The decision to engage in job search (and therefore being considered as unemployed rather than discouraged) is expected to be endogenous to the search environment. Whether these workers are considered as unemployed or inactive has an important impact on the estimated unemployment and inactivity rates and therefore has policy implications. In Kosova, we find that 18 percent of the inactive individuals might be more appropriately classified as discouraged workers. If they are considered as labour force participants then the ILO defined unemployment rate increases by 5 percentage points and the inactivity rate decreases by 7 percentage points. The discouraged workers are in many respects similar to the ILO unemployed. Investigating the determinants of engaging in job search (i.e. being ILO unemployed as opposed to being a discouraged worker), we find that overall males and the more educated show a stronger attachment to the labour market. Our advice is for national statistics to report both narrow (ILO definition) and broad (that accounts for the discouraged workers) unemployment rates.