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The Changing Labour Force Participation of Canadians, 1969-96: Evidence from a Panel of Six Demographic Groups

In: A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999)

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Author Info

  • Mario Fortin
  • Pierre Fortin

Abstract

Cyclical, policy changes, and structural factors have been put forward to explain the decline in labour force participation in Canada in the 1990s. In the first article in the symposium, Pierre Fortin and Mario Fortin attempt to determine the relative importance of these three types of factors by estimating a participation rate equation where the independent variables are an index of job availability (the Help-Wanted Index), the real wage, the real minimum wage, an index of unemployment insurance generosity, real social assistance benefits, and a time trend to capture other structural influences. The equation is estimated for six demographic groups (men and women 15-24, 25-54 and 55 and over) over the 1969-96 period. They find that the drop in the aggregate participation rate in the 1990s was equally due to the three factors: poor macroeconomic conditions, policy changes in unemployment insurance and the minimum wage, and structural transformations. The explanatory power of the equations is found to be good for the younger and middle-age groups, but poor for the older groups. The equations show no significant shift over the 1990-96 sub-period, implying that the decline in the participation rate in the 1990s should not be attributed to a new structural relationship. In terms of the variables, the authors find that young people, and to a less extent, middle-aged persons, respond positively to cyclical variations in job opportunities, but older persons do not; minimum wages affect negatively the labour force participation of the younger age groups and middle-aged women; UI generosity affects positively only youth participation; and social assistance affects negatively the participation of middle-aged women. The authors use their equations to simulate the impact of changes in cyclical, policy, and structural variables on labour force participation of the six groups in the 1990-97 period. The model can account for 2.6 percentage points of the total 2.7 percentage point decline in the aggregate participation rate between 1989 and 1997. Reduced job availability was responsible for 37 per cent of the decline, increases in the real minimum wage 15 per cent, decreased UI generosity 19 per cent, falls in social assistance benefits made a 4 per cent negative contribution to the decline in participation, and structural factors accounting for the remaining 30 per cent of the decline. These structural factors included rising school attendance, the changing roles of men and women in society, the changing demand and supply of skills, the expansion of public pension plans, and the rising average age of the 55 and over group. The simulations explained quite well the evolution of labour force participation for all groups except older males. Perhaps surprisingly, none of the large decline in participation of this group was found to be due to reduced job availability. The finding that only about 40 per cent of the decline in labour force participation in the 1990s is cyclical has important implication for the path of potential output. The authors find that whatever the value of the non-accelerating inflation rate of unemployment (nairu), in a non-inflationary cyclical recovery, the participation rate is unlikely to rise more than 0.8 percentage points from the 1997 level of 64.8 per cent.

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File URL: http://www.csls.ca/journals/simp/simp02.pdf
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Bibliographic Info

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This chapter was published in: Andrew Sharpe & Louis Grignon (ed.) A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), Centre for the Study of Living Standards, pages 12-24, 1999.

This item is provided by Centre for the Study of Living Standards in its series A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999) with number 02.

Handle: RePEc:sls:lfpcbe:02

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Related research

Keywords: Labour Force Participation; Labor Force Participation; Participation Rate; Labour Force Participation Rate; Labor Force Participation Rate; Canada; Output Gap; Potential Employment; Potential Output; Potential Growth; Forecast; Simulation;

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References

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  1. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
  2. Killingsworth,Mark R., 1984. "Labor Supply," Cambridge Books, Cambridge University Press, number 9780521299169, October.
  3. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-31, August.
  4. Archambault, R. & Fortin, M., 1997. "La courbe de Beveridge et les fluctuations du chomage au Canada," Papers w-97-4f, Gouvernement du Canada - Human Resources Development.
  5. Paul Beaudry & Thomas Lemieux, 1999. "Evolution of the Female Labour Force Participation Rate in Canada, 1976-1994: a Cohort Analysis," A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), in: Andrew Sharpe & Louis Grignon (ed.), A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), pages 57-70 Centre for the Study of Living Standards.
  6. David Card & Craig Riddell, 1996. "Unemployment in Canada and the United States: A Further Analysis," Working Papers 731, Princeton University, Department of Economics, Industrial Relations Section..
  7. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  8. Fortin, Pierre, 1984. "Unemployment insurance meets the classical labor supply model," Economics Letters, Elsevier, vol. 14(2-3), pages 275-281.
  9. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  10. Murphy, Kevin M & Topel, Robert H, 1997. "Unemployment and Nonemployment," American Economic Review, American Economic Association, vol. 87(2), pages 295-300, May.
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Citations

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Cited by:
  1. Romain Duval & Mehmet Eris & Davide Furceri, 2011. "The Effects of Downturns on Labour Force Participation: Evidence and Causes," OECD Economics Department Working Papers 875, OECD Publishing.
  2. Irene Ip & Sheryl King & Geneviève Verdier, 1999. "Structural Influences on Participation Rates: A Canada-U.S. Comparison," A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), in: Andrew Sharpe & Louis Grignon (ed.), A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), pages 25-41 Centre for the Study of Living Standards.
  3. Richard Archambault & Louis Grignon, 1999. "Decline in Youth Participation in Canada in the 1990s: Structural or Cyclical?," A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), in: Andrew Sharpe & Louis Grignon (ed.), A Symposium on Canadian Labour Force Participation in the 1990s (Special Issue of Canadian Business Economics, Volume 7, Number 2, May 1999), pages 71-87 Centre for the Study of Living Standards.
  4. Marcello M. Estevão & Evridiki Tsounta, 2010. "Canada's Potential Growth," IMF Working Papers 10/13, International Monetary Fund.
  5. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.

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