Working Paper: NBER ID: w29222
Authors: Bart Hobijn; Ayegl Ahin
Abstract: We investigate the source, magnitude, and unevenness of the procyclical forces that shape labor force participation, i.e., the participation cycle, which are important for the implementation of the maximum employment mandate. We show that these forces can be analyzed in real time using a flow decomposition of the changes in the labor force participation rate. The decomposition reveals that the source of the participation cycle is fluctuations in job-loss and job-finding rates, rather than cyclical movements in labor force entry and exit rates. The magnitude of the participation cycle is large. Cyclical downward pressures on employment from participation are two-thirds that of unemployment. Moreover, the participation cycle delays the recovery in employment because it lags the unemployment cycle. It also amplifies the unevenness of the impact of recessions. Groups that see large increases in their unemployment rates also experience more pronounced participation cycles. Despite differences in their magnitudes, the source of the participation cycle is the same for all groups. Application of our method to the COVID-19 Recession suggests that, as of June 2021, the bulk of the drop in the participation rate since the onset of the pandemic is cyclical and that the cyclical recovery in participation likely will trail that of the unemployment rate.
Keywords: labor force participation; maximum employment; business cycles; unemployment; job finding
JEL Codes: J20; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| job loss (J63) | labor force participation rate (J49) |
| job finding (J68) | labor force participation rate (J49) |
| job loss and job finding (J63) | employment-to-population ratio (J68) |
| unemployment cycle (J64) | labor force participation cycle (J22) |
| unemployment rate decline (J64) | labor force participation rate (J49) |
| employment stability (J63) | labor force participation rate (J49) |
| economic expansion (F43) | labor force participation rate (J49) |