The ‘Bottini Effect’

The ‘Bottini Effect’

Job Seeker’s may not be disaffected, they might just not need the money

The September job figures showed a drop in the unemployment rate. This must be an unambiguously good thing right? Not necessarily… The unemployment rate is calculated as the number of people looking for a job divided by the total size of the labour force (equal to the amount of people with jobs plus those searching for employment).

What actually happened this month is that whilst 8,800 jobs were lost, the participation rate (labour force divided by working aged members of the population) fell by 0.2%, with the overall outcome being that the unemployment rate fell i.e. more than 8,800 people, either job seekers or those who had just lost their job, decided to stop looking for work and thus exit the labour force.

The usual explanation given for a drop in the participation rate is that job seekers become disaffected; no longer believing that they will be able to find a job, they cease to try. Stephen Koukoulas, one of our panellists at ESSA Q&A and a strong supporter of our society, put forward an alternative explanation via Twitter. Stephen proposed that low interest rates might be the key to explaining the fall in the participation rate, not job seekers losing hope. Stephen referred to the ‘Bottini effect’ whereby low interest rates lower household costs, through reduction of loan repayments, making it unnecessary for each member of the house to earn an income. Hence some people who no longer need the money simply drop out of the labour force.

This is not to say that these people are lazy and simply do not wish to work. When work is removed as a necessity needed to pay the bills, people are faced with a choice with how best to allocate their time to maximise the utility of themselves and their families. There is no right choice. Utility maximisation depends solely on the individual’s preferences.