Labour Force Participation and Education

A simplistic view of the cross-sectional positive relationship between education and labour force participation would surmise that the historical educational lift across birth cohorts should have increased participation. But instead, participa-tion rates have trended down in recent years – especially for males. In this paper we analyse the development in labour force participation of cohorts of males and females with different levels of education, and how it has been affected by the la-bour market situation of individual cohort groups. We are particularly interested in the impact of increasing education levels across cohorts and the extent to which this may have affected labour force participation rates of groups with dif-ferent education levels – and in turn, the overall participation for males and fe-males. Indeed, despite a huge upwards shift in education levels across birth cohorts, the overall labour force participation rate has trended down. As such, it seems obvious to conclude that the marginal participation effect of increasing the edu-cation level of new cohorts is much less than 100 per cent. We demonstrate that an important explanation for the absent increase in labour force participation is the so-called dilution effect, whereby increasing the educating level of a cohort by lifting individuals from unskilled to skilled potentially reduce the average partic-ipation rates of both the unskilled and the skilled. Using panel data covering three and a half decades, we apply a cohort-based approach that allows us to identify and quantify factors that have influenced labour force participation year by year, such as business cycles, labour market policies and administrative practices. We investigate the effects of cohort specific impacts such as the increasing education attainment across cohorts and the potential scarring effects of entering the labour market during times of persistently high unemployment rates. We show through estimated gender and education specific cohort profiles of lifetime participation, that have been thoroughly cleaned from business cycle and other external influ-ences, that only the unskilled and to a lesser extent the vocationally trained males and females have been adversely affected by the dilution effect. In contrast, the labour force participation of the tertiary educated have so far been largely unaf-fected. These findings contribute to understanding the historical returns to the educational lift of the labour force. However, the findings also provide new in-sights into the role of education in the size and the composition of the labour force going forward – insights that could be used for the labour force prognostics that feed into the government’s budget forecasts and evaluation of fiscal sustain-ability.