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The role of non-participants in labour market dynamics

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The unemployment rate fluctuates considerably over the business cycle. Most mainstream macroeconomic models treat movements in the unemployment rate as being driven by flows between two states of labour market participation – employment and unemployment. In this paper, we examine the influence of a third labour-market state – those not in the labour force (or non-participants). These are working-age individuals who are neither officially employed or officially unemployed, such as non-working university students, stay-at-home parents, and early retirees. We explore the role for non-participants in determining labour market outcomes using a dataset called gross flows. Gross flows measure the total number of people who transition between each labour market state each quarter. We find that flows via non-participation account for about two-thirds of the movements in the unemployment rate, which is much higher than in comparable international studies. This suggests non-participants influence the labour market in New Zealand. We find that there is a large pool of potential workers among non-participants, and that this pool of potential workers influences wage determination. Overall, our findings suggest that non-participants can add significant value to our understanding of labour market dynamics.

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  • Jed Armstrong & Özer Karagedikli, 2017. "The role of non-participants in labour market dynamics," Reserve Bank of New Zealand Analytical Notes series AN2017/01, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbans:2017/01
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    1. Gomes, Pedro, 2012. "Labour market flows: Facts from the United Kingdom," Labour Economics, Elsevier, vol. 19(2), pages 165-175.
    2. Elsby, Michael W.L. & Hobijn, Bart & Şahin, Ayşegül, 2015. "On the importance of the participation margin for labor market fluctuations," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 64-82.
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    7. Brian Silverstone & Will Bell, 2011. "Gross Labour Market Flows in New Zealand: Some Questions and Answers," Working Papers in Economics 11/15, University of Waikato.
    8. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, May.
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    Cited by:

    1. Christopher Ball & Nicolas Groshenny & Özer Karagedikli & Murat Özbilgin & Finn Robinson, 2020. "How wages respond to the job-finding and job-to-job transition rates? Evidence from New Zealand administrative data," CAMA Working Papers 2020-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Jamie Culling & Hayden Skilling, 2018. "How does New Zealand stack up? A comparison of labour supply across the OECD," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-19, April.
    3. Finn Robinson, 2020. "Vacancies, unemployment and labour market slack in New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2020/07, Reserve Bank of New Zealand.
    4. Christopher Ball & Nicolas Groshenny & Oezer Karagedikli & Murat Oezbilgin & Finn Robinson, 2020. "Low wage growth and job-to-job transitions: Evidence from administrative data in New Zealand," MAGKS Papers on Economics 202021, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    5. Punnoose Jacob & Martin Wong, 2018. "Estimating the NAIRU and the Natural Rate of Unemployment for New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2018/04, Reserve Bank of New Zealand.

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