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Labor market programs, the discouraged-worker effect, and labor force participation

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    This paper estimates the macroeconomic effect of labor market programs on labor force participation. Labor market programs could counteract business-cycle variation in the participation rate that is due to the discouraged-worker effect, and they could prevent labor force outflow. An equation that determines the participation rate is estimated with GMM, using panel data (1986-1998) for Sweden's municipalities. The results indicate that labor market programs have relatively large and positive effects on labor force participation. If the number of participants in labor market programs increases temporarily by 100, the labor force increases immediately by around 63 persons. The effect is temporary so the number of participants in the labor force returns to the old level in the next period. If the number of participants in programs is permanently increased, the labor force increases by about 70 persons in the long run. Programs are reducing the business-cycle variation in labor force participation because the effect is positive and programs are counter-cyclical and they counteract the discouraged-worker effect in the long run. The results indicate that programs could prevent labor force outflow; participants who would have left labor force in the abscence of programs are may now be participating because of the programs. Wages and vacancies have positive long- and short-run effects on participation rate. Open unemployment, the job destruction rate, and proportions of persons between ages 18-24 and 55-65 have negative long run effects on the participation rate.

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    File URL: http://www.ifau.se/upload/pdf/se/2002/wp02-09.pdf
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    Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2002:9.

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    Length: 50 pages
    Date of creation: 30 May 2002
    Date of revision:
    Handle: RePEc:hhs:ifauwp:2002_009
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    1. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
    2. Calmfors, Lars & Forslund, Anders & Hemström, Maria, 2002. "Does Active Labour Market Policy Work? Lessons from the Swedish Experiences," Seminar Papers 700, Stockholm University, Institute for International Economic Studies.
    3. Dahlberg, M. & Forslund, A., 1999. "Direct Displacement Effects of Labour Market Programmes: the Case of Sweden," Papers 1999:22, Uppsala - Working Paper Series.
    4. Holmlund, Bertil & Linden, Johan, 1993. "Job matching, temporary public employment, and equilibrium unemployment," Journal of Public Economics, Elsevier, vol. 51(3), pages 329-343, July.
    5. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
    6. repec:rus:hseeco:10108 is not listed on IDEAS
    7. Forslund, Anders & Kolm, Ann-Sofie, 2000. "Active labour market policies and real-wage determination - Swedish evidence," Working Paper Series 2000:7, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    9. Burda, Michael C & Wyplosz, Charles, 1993. "Gross Worker and Job Flows in Europe," CEPR Discussion Papers 868, C.E.P.R. Discussion Papers.
    10. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
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