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The Effects of Downturns on Labour Force Participation: Evidence and Causes

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  • Romain Duval
  • Mehmet Eris
  • Davide Furceri

Abstract

This paper uses an impulse-response function approach to assess the magnitude and persistence of the effects of downturns on labour force participation for a sample of 30 countries over the period 1960-2008. Past severe recessions appear to have had a significant and persistent impact on participation, while moderate downturns did not. The aggregate participation rate effect of severe downturns peaked on average at about 1½ to 2½ percentage points five to eight years after the cyclical peak, and was still significant after almost a decade. Youths and older workers account for the bulk of this effect. Institutional and policy settings are found to be an important factor having shaped the response of participation to economic downturns. In particular, early retirement incentives embedded in old-age pension schemes and other social transfer programmes are found to amplify the responsiveness of older workers’ participation to economic conditions. However, the findings in this paper do not seem to apply to the most recent crisis, partly because the labour market situation did not deteriorate as much as the magnitude of the recession would have suggested in a number of OECD countries. Les effets des retournements de conjoncture sur la participation au marché du travail : Evidence et causes Cet article utilise une approche impulsion-réponse pour évaluer l’ampleur et la persistance des effets des retournements de conjoncture sur la participation au marché du travail pour un échantillon de 30 pays de l’OCDE sur la période 1960-2008. Il apparaît que les récessions sévères ont eu un impact significatif et persistant sur la participation dans le passé, au contraire des retournements de cycle plus modérés. L’effet agrégé des récessions sévères sur la participation a atteint un pic de 1½ à 2½ points de pourcentage cinq à huit ans après le point haut du cycle, et était toujours significatif après presque une décennie. Les jeunes et les seniors ont contribué à l’essentiel de cet effet. Les facteurs politiques et institutionnels jouent un rôle important dans la réponse de la participation aux retournements conjoncturels. En particulier, il apparaît que les incitations au départ anticipé à la retraite contenues dans les régimes de retraite et les autres systèmes de transferts sociaux accroissent la sensibilité de la participation des seniors aux conditions économiques. Pour autant, les résultats de cet article ne semblent pas s’appliquer à la crise récente, en partie parce que la situation du marché du travail ne s’est pas détériorée autant que l’ampleur de la récession aurait pu le suggérer dans un certain nombre de pays de l’OCDE.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 875.

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Date of creation: 21 Jun 2011
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Handle: RePEc:oec:ecoaaa:875-en

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Keywords: retirement; labour force participation; downturn; recession; hysteresis; crisis; crise; récession; retournements de conjoncture; retraites; participation au marché du travail; hystérésis;

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Cited by:
  1. Bernal-Verdugo, Lorenzo E. & Furceri, Davide & Guillaume, Dominique, 2013. "Banking crises, labor reforms, and unemployment," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1202-1219.
  2. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, vol. 40(12), pages 2369-2378.
  3. Davide Furceri & Lorenzo E. Bernal-Verdugo & Dominique M. Guillaume, 2012. "Crises, Labor Market Policy, and Unemployment," IMF Working Papers 12/65, International Monetary Fund.
  4. Åsa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Philip Bagnoli & Guillaume Bousquet & Francesca Spinelli, 2013. "Long-Term Growth Scenarios," OECD Economics Department Working Papers 1000, OECD Publishing.
  5. Task Force of the Monetary Policy Committee of the European System of Central Banks, 2012. "Euro area labour markets and the crisis," Occasional Paper Series 138, European Central Bank.
  6. Filges, Trine & Larsen, Mona & Pedersen, Peder J., 2012. "Retirement: Does Individual Unemployment Matter? Evidence from Danish Panel Data 1980–2009," IZA Discussion Papers 6538, Institute for the Study of Labor (IZA).

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