Question

What happens to the labor force participation rate when employed individuals are reclassified as unemployed? What happens when they are reclassified as discouraged workers?

Short answer

In both situations, the outcome is different.

Step-by-step solution

Step 1. Definition

Unemployed is a person who is constantly looking for a job or work and he/she is also capable of doing work but don’t able to get a job then they are unemployed.

Discouraged workers are defined as the workers who have discontinued their looking for a job as they are not finding employment options and failed to be nominated for a job. Because of this they are discouraged and classified under discouraged workers.

Step 2. Explanation

So, in the question, the first case is given that if the employed workers are reclassified as unemployed, then the labor force participation rate will not change because in labor force participation both employed and unemployed are counted, because unemployed persons are looking for work so they are included in the labor force.

Step 3. Discouraged workers

On the other hand, if the unemployed are reclassified as discouraged workers, then the unemployed people decline. Because of this the labor force declines and in turn unemployment rate also declines.