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Evolution of Behavior, Uncertainty, and the Difficulty of Predicting Labor Force Participation

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  • Patrick Higgins
  • Julie L Hotchkiss
  • Ellyn Terry

Abstract

Paper demonstrates the difficulty of forecasting labor force participation (LFP) rates by showing that a random walk does just as well as select sophisticated econometric models in predicting short-term aggregate LFP. Most efforts to improve forecasts of LFP focus on fine-tuning predictions of determinants (i.e., demographics and labor market conditions). However, we show that even perfect knowledge of future demographic trends and labor market conditions is not enough to overcome the additional difficulty posed by changes in behavior over time. Behavior in this paper refers to the way in which demographics and labor market conditions impact labor supply decisions (i.e., parameter coefficients).

Suggested Citation

  • Patrick Higgins & Julie L Hotchkiss & Ellyn Terry, 2019. "Evolution of Behavior, Uncertainty, and the Difficulty of Predicting Labor Force Participation," Business and Economic Research, Macrothink Institute, vol. 9(4), pages 157-178, December.
    • Handle: RePEc:mth:ber888:v:9:y:2019:i:4:p:157-178
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    References listed on IDEAS

    as
    1. Faust, Jon & Wright, Jonathan H., 2009. "Comparing Greenbook and Reduced Form Forecasts Using a Large Realtime Dataset," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 468-479.
    2. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    4. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
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    Cited by:

    1. Julie L. Hotchkiss, 2022. "Millennials: Maligned or miscreants?," Southern Economic Journal, John Wiley & Sons, vol. 88(4), pages 1248-1276, April.

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    More about this item

    Keywords

    Labor force participation; Labor supply; Random walk; Behavior; OASDI; EIA; Board of Governors;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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