The Discouraged Worker Effect and the Added Worker Effect within the Framework of European Debt Crisis

Abstract

The debt crisis experienced in Europe has had several adverse effects on economies of countries. Employment is one of the adversely affected areas. The relationship between the labor force participation rate and unemployment is essentially examined within the framework of two hypotheses. These hypotheses are “The Discouraged Worker Effect” and “The Added Worker Effect”. The discouraged worker effect anticipates that workers looking for employment for extended periods of time will withdraw from the labor market due to losing hope in periods of economic recession. According to this hypothesis, it is expected that the labor force participation rate will increase once the unemployment rate decreases and vice versa. The added worker effect anticipates that if the worker who provides the livelihood of the family becomes unemployed, other members of the family will participate in the labor market. According to this hypothesis, it is expected that the labor force participation rate will decrease once the unemployment rate decreases and vice versa. This study aims to test whether these two effects apply to selected Euro zone countries (PIIGGS-Portugal, Ireland, Italy, Greece, Great Britain, Spain) during the European Debt Crisis .