In today’s rapidly evolving job market, many workers are finding themselves needing to switch careers. This may be due to industry disruption, changes in personal interests, or a desire for greater job security. Whatever the reason, transitioning to a new career can be challenging, especially if the new field seems unrelated to one's previous experience.

How Prospect Theory Drives Unemployment

HomeHow Prospect Theory Drives Unemployment

How Prospect Theory Drives Unemployment

Woman on a laptopDo people really just not want to work today, or is it something else? Prospect Theory is a behavioral economics theory that helps explain why people often make irrational decisions to avoid perceived losses over realizing small gains, even at the risk of unemployment. When applied to the job search process, Prospect Theory helps explain why individuals who have lost a high-paying job may be hesitant to accept a lower-paying job, even if they are qualified for it. This is because the potential loss associated with taking a lower-paying job is often seen as more significant than the potential gain of having a job.

For example, imagine a worker who has lost a job that pays $100,000 per year. They are offered a new job that pays $60,000 per year. Even though the new job would provide them with income and benefits, they may be hesitant to take it because the potential loss of $40,000 per year is significant to them. The pain of losing $40,000 is felt more acutely than the pleasure of gaining $60,000.

Prospect Theory and Unemployment

This is where the connection between Prospect Theory and job search becomes clear. Workers who have experienced high-paying job loss may be less willing to take a lower-paying job because the potential loss associated with it is perceived as more significant than the potential gain. Such thinking can significantly impact their job search process and prolong the duration of the search, leading to extended periods of unemployment. Furthermore, it can lead to lower labor force participation rates as workers may become discouraged and drop out of the labor force altogether.

Demographic Most Heavily Impacted

It is also important to note that certain groups may face unique challenges when it comes to job loss and job search. For example, research has shown that white males have experienced declining labor force participation rates in recent years, which could be related to the challenges of job search and the psychological impacts of high-paying job loss. According to recent data, the decline in labor force participation among white males is a trend that cannot be ignored as it is larger in white males than in other demographics. In 2021, the labor force participation rate for white men aged 16-64 was 80.0%, down from 81.3% in 2010.

Actions Employers & Policymakers can Take

To address these issues, it is important for employers and policymakers to recognize the challenges that workers face during the job search process. This can include providing retraining and upskilling opportunities to help workers acquire new skills and increase their employability. Additionally, financial and emotional support during the job search process can help workers manage the stress and uncertainty of job loss.

By understanding the impacts of Prospect Theory on job search, employers and policymakers can work towards creating a more supportive and equitable workforce for all. This can help reduce the negative impacts of high-paying job loss on workers and promote greater labor force participation rates, leading to a stronger and more resilient economy. Stay informed of the latest workforce data and labor market topics by visiting our Charlotte Works website and staying connected with the NCWorks Business Engagement Team.



By: Kevin Loux

Chief Impact Officer

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