Unemployment for a long time period discourage people who are seeking jobs, they leave searching job due to disappointment. This effect increases in recession. It will decrease the total household income, so the other family members are forced to join labour market in order to fill the gap of income decrease. This effect of inducement entry in to labour market is known as added worker effect. This says that the females and young workers are secondary worker. Discouraged worker means that secondary worker have a propensity to join and leave the labour force with business cycle fluctuations. These are the people who are searching jobs when available and quit searching during recession.
Waldimir S. woytinsky and Don D. humphery in 1940 firstly studied the concept of added worker empirically but they did not observe it clearly and also did not deny its participation. The theories on the cyclical behavior of the participation of secondary workers were given by Jacob Mincer in 1962 on the basis of family economics by considering the concepts of hours of work, family context, work choice and temporal distribution of work. Generally the link of women with labour market is weaker than married or single man. To determine the impact of high unemployment it is important to examine the outcomes if discouraged worker cannot find the job, then the added worker supply more pressure to the labour market. Both the added worker and discouraged worker are opposite in direction the added worker shows countercyclical trend and discouraged worker shows procyclical trend on business cycle.
The possibility of job finding brings much change over the business cycle rather than changes in real wage rate. Due of this reason people choose spending time at home is more useful whether destroying their time in searching jobs the substitution effect leads in this situation. That substitution effect is known as the discouraged worker effect. In another case when labour supply decision are interdependent, then for maintain living standards during a recession can attract other workers into the labour force even the real wage is low. This kind of response is known as the added worker effect. Due to different groups of people added-worker and the discouraged-worker effects can coexist.
Labour supply decision of both partners depends on relative wage effects in two ways. Firstly changes in individual wage rate and secondly the change of wage rate of their partner or from other family member. Decrease in relative wage will cause a decline in labour supply and living standards of people. It is also associated with relative wages as wage decreases family living standards possibly decreases.
Added worker effect.
Added worker effect is simply describe as AWE=β+ β URATE, where β shows how the female labour supply changes depending on the business cycle, represented by the national unemployment rate. Theoretical concept of added worker is given by Mincer (1962, 1966). After two decades first empirical analysis was conducted by Heckman and Macurdy in early 1980. This hypothesis states that in a static model of household labour supply. When husband lost his job it will causes to increase labour supply of his wife. The purpose behind this is to compensate the reduced family income due to husband unemployment and same situation with the participating wife by increasing more working hours, assuming that leisure is a normal good this is known as income effect. The second effect is through cross wage among partners. It depends on both partners leisure times whether they are substitutes or complements.
Added worker effect depends on size of wealth loss and also on how sudden the job loss. In the context of life cycle model anticipated or unanticipated income loss is also considered. The anticipated wealth loss would not cause income effect and an unanticipated income loss increases added worker effect unrelatedly of the existence of liquidity constraint. Added worker effect starts from the familiar setting where a household maximizes utility, which is a function of leisure and working hours (consumption) of household members, subject to a budget constraint and a time constraint.
Max U (Li, Ci) (1.1)
An additional constraint variable H* is introduced which is reflecting that desired labour supply may exceed a fixed level. If it is binding, actual hours of work will equal the constraint level H.
Σ Ci=Σ Wi Hi+Y (i)
Li= T-Hi (ii)
Hi ≤ H* (iii)
H*≥ 0 ;Hi ≥0; Ci ≥0
In these equations Li is leisure and Ci is showing consumption, Wi is wage and Hi labour supply of individual, Y is showing non-labour income of household. Assuming that all income consumed and Ci is fully determined by Hi. Therefor an individual labour supply is function of wage, household income, other member labour supply constraint and their labour income.
Hi = f (Wt, Y, Hj ,WjHi) i= 1,………..,n (1.2)
Uj = g(Hj , Wi Hj ) (1.3)
Where Uj showing each members labour supply constraint and labour income, or it is a logical variable which is one when constraint is binding or otherwise zero. When income from other sources is large then individual can choose not to work. When she is unemployed the equation becomes
Hi = f (Wi , Y , Uj ) i≠ j (1.4)
Hi = f (Wi , Y, U1,…Un) (1.5)
This model examines husband employment status on wife labour supply.
According to life cycle model.
According to life cycle model of labour supply, assumes that individuals maximize their utility subject to constraints. This intertemporal framework simplifies the possibility of labour supply and participation in many ways such as variations in labour supply and participation behavior differences in savings and borrowing behavior across individuals, exogenous and endogenous nature of non-labour income, wage uncertainty, interest rate uncertainty, health uncertainty, employment uncertainty, on consumption, wealth accumulation, and labour supply behavior can be investigated. The life-cycle labour supply model implies that a woman’s labour supply(H) in family i at time t is in general a function of the family’s marginal utility of wealth (λ it ), parameters are showing the marginal utility of her leisure time (ωi ), her wage offer ( ln f w it ), and ‘taste modifiers’ of the female’s leisure (x it ). (Gong, 2010)
Hit=f(λit ωi lnᴡit χit) (1.6)
Discouraged worker effect.
The discouraged worker hypothesis states that the partners facing same condition as it is prevailed in case of added worker. As the economic recession cause unemployment of husband which will directly reduce wife employment too. As the reduction in wage the wives are unwilling to enter labour force. According to this discouraged worker is dominated over added worker effect, or discouraged worker effect can also examine at a high inflation rate which decreases labour force participation rate due to decrease in real wage rate. Simply discouraged worker are those people who stopped searching job because of worst economic conditions they believe that no work is exist for them. The discouraged worker implies that.
v(0)≥U0 ≻ v(0)-c/q (1.7)
Where U0 is the worker’s utility of being out of the labour force and c is the search cost. The term V (0) can be interpreted as the highest possible level of the value of searching for work, occurring when c/q=0. This above inequality says that the worker would like to search for work if the job arrival intensity q is infinite or c=0, whereas the second inequality says that she will not search under the existing labour market situations. (Dagsvik, J. K., et al 2010)