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Labour Supply in a High Unemployment Economy: Discouraged Workers

We now investigate the presence of discouragement amongst the inactive population in Kosova and the implications for its labour supply. From the sample of 4,460 working age individuals, 29 percent are unemployed on the basis of ILO definition and 39 percent are inactive (Table 3). Examining the reasons for not searching (given in Table A4), we find that 18 percent of inactive persons have answered “ because I cannot find a job” which may indicate that they are discouraged workers. They constitute 23 percent of the ILO defined unemployed and 11 percent of the ILO defined labour force in Kosova. This is higher than in many OECD countries (OECD, 1995; Jones and Riddell, 1999), and supports our argument above that in high unemployment economies the discouragement effect among the non-employed individuals is more pronounced. If they are included among the unemployed, then unemployment increases from 48 percent (ILO definition) to 53 percent (broad definition) and the inactivity rate decreases from 39 to 32 percent.
To investigate whether it is more appropriate to include discouraged workers (Nd) that we identified above among the labour force we consider whether they are close to the ILO unemployed (ILO-U) or to the rest of inactive population (Nnot-d) in their characteristics. In columns 2, 3 and 4 of Table 4 we present the mean of the variables used in the labour supply determinants for Nnot-d, Nd and ILO-U respectively. This data suggests the Nd tend to be more similar in most respects to ILO-U than to Nnot-d. Females are over-represented both among Nd and Nnot-d indicating their weaker attachment to the labour market compared to males. We run a series of t-tests to examine if these observed differences are statistically significant. From column 5, the null hypothesis of equal means (or equal proportions) between Nd and Nnot-d is rejected in 13 out of 17 cases. From column 6, the null hypothesis of equal means between Nd and ILO-U is rejected only in 7 of the 17 cases. Therefore, we find evidence to conclude that: (i) the inactive individuals are not a homogenous group and the discouraged workers can be statistically differentiated from the rest of inactive population; and (ii) the discouraged workers are in many respects similar to the ILO unemployed and arguably they should be considered as unemployed rather than inactive.

Table 3: Unemployment and inactivity rates when the discouraged workers are treated as unemployed

Abbreviation used in the text Nr. Proportion
1. All population of age 16-64* 4,460 1.00
1.1. Employed E 1,422 0.32
1.2. Unemployed (based on ILO guidelines) ILO-U 1,309 0.29
1.3. Inactive (based on ILO guidelines) N 1,729 0.39
– The discouraged workers Nd 303 0.18
– Other inactive workers Nnot-d 1,426 0.82
2. The ratio of discouraged workers to ILO unemployed 0.23
3. The ratio of discouraged workers to ILO active labour force 0.11
4. The ILO defined unemployment rate 0.48
5. Unemp. rate if discouraged workers are considered as unemployed 0.53
6. Inactivity rate based on ILO guidelines 0.39
7. Inactivity rate if Nd are considered as unemployed 0.32

Table 4: Findings from t-tests for the Differences between (i) Nd and N„ot.d and (ii) Nd and ILO-U

Variables Type of test Inactive individuals (N) ILO-U He:Ц3=Ц2 He:Ц3=Ц4
All (N) Nnot-d Nd
H-1 H-2 H-3 Ц4
Gender structure (males) Proportion 0.230 0.206 0.343 0.538 Rejected Rejected
Average age Mean 38.41 39.88 31.51 30.45 Rejected Not
Age structure
16-24 Proportion 0.231 0.200 0.376 0.361 Rejected Not
25-34 Proportion 0.225 0.210 0.294 0.325 Rejected Not
35-44 Proportion 0.177 0.175 0.185 0.201 Not Not
45-54 Proportion 0.167 0.188 0.066 0.079 Rejected Not
55-64 Proportion 0.201 0.227 0.079 0.034 Rejected Reject
Marital status Proportion 0.725 0.752 0.594 0.537 Rejected Not *
Average educational level (years) Mean 8.780 8.604 9.604 10.61 Rejected Rejected
Less than upper-secondary education Proportion 0.703 0.726 0.591 0.368 Rejected Rejected
Upper-secondary education Proportion 0.260 0.238 0.366 0.571 Rejected Rejected
Higher education Proportion 0.030 0.027 0.043 0.061 Not Not
Residence (urban) Proportion 0.394 0.414 0.304 0.425 Rejected Rejected
Household incomes
Household incomes per capita (€/month) Mean 60.35 63.72 44.51 49.34 Rejected Not
Household labour incomes per capita, (€/month) Mean 36.95 39.18 26.44 30.34 Rejected Not
HH non-labour income per capital, (€/month) Mean 23.46 24.60 18.08 19.03 Not * Not
A household member is emigrant Proportion 0.252 0.251 0.254 0.193 Not Rejected
Observations 1,729 1,426 303 1,309