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Discouraged Workers in Developed Countries and Added Workers in Developing Countries? Unemployment Rate and Labour Force Participation

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  • Grace H.Y. Leea
  • Jaai Parasnis

Abstract

Changes in the unemployment rate can have differing impacts on the labour force participation rate depending on the strength of the added worker effect and the discouraged worker effect. This paper documents the differences in the relationship between the unemployment rate and the labour force participation rate across a panel of developing countries and OECD countries. We employ a system GMM approach to control for and to establish the bi-directional causality between unemployment and labour force participation. We find that the discouraged worker effect does dominate in developed countries, while dominance of the added worker effect in developing countries leads to an increase in labour force in the face of rising unemployment.

Suggested Citation

  • Grace H.Y. Leea & Jaai Parasnis, 2014. "Discouraged Workers in Developed Countries and Added Workers in Developing Countries? Unemployment Rate and Labour Force Participation," Monash Economics Working Papers 15-14, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2014-15
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    Keywords

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    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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