Cyclical Variation in Civilian Labor Force Participation

Abstract

A LONG standing issue in labor market analysis is the question of the relationship between cyclical variations in economic activity and labor force participation. There are three main hypotheses that have vied for attention. hypothesis holds that when economic activity declines, workers become discouraged and leave the labor force. hypothesis maintains that labor force participation increases at low levels of economic activity when workers enter the labor force under the pressure of the loss of work by the primary worker.' hypothesis maintains that any inflow of additional workers is offset by an outflow of discouraged workers so that, on balance, the over-all participation rate remains virtually constant, or that at least there is no clearly discernible cyclical relationship.2 In this paper, we present evidence that lends clear cut support to both the discouraged worker and the additional worker hypotheses. An initial decline in from a cyclical peak results in large-scale discouragement and withdrawal from the labor force. Subsequent declines in are met by a smaller decline in labor force participation. As the period of economic slack grows longer, pressure on additional workers to enter the labor force builds up and this tends partially to offset the discouragement effect. Statistical isolation of these effects has resulted in our ability to explain 88 per cent of the variation, after allowance for seasonal change, in labor force participation over the last decade. Our method takes into account the duration of unemployment and explains why a given change in produces different quantitative changes in participation at different times, and thereby, shows why univariate tests of the hypotheses have been inconclusive. discouraged worker effect is, in general, the dominant effect. Thus, for the period 19531962, the rule of thumb that emerges is that the loss of 100 jobs is roughly associated with a reduction in the size of the measured labor force of 50 persons. Because the dominant effect is withdrawal from the labor force, the official unemployment statistics understate the magnitude of unemployment during periods of economic slack. In order to provide a more accurate guide for short-run policies, we utilize our results to construct or full employment labor force series. By labor force we mean that size labor force that would have been recorded had the economy been at employment. These labor force series are then utilized to recalculate the level of unemployment and the unemployment rate. These calculations provide us with measures of the gap, defined as measured unemployment plus net cyclical withdrawal from the labor force. For November 1962, the official seasonally adjusted unemployment rate was 5.8 per cent. manpower gap unemployment rate, however, stood at between 9.45 and 10.30 per cent; the difference between the two gap rates being dependent upon the criterion of that was used in the calculations. One of our findings is that there has been a rising secular trend in the labor force participation ratio. Forecasts based on these findings suggest that the potential labor force in 1975 will be at least four million more than is currently projected by the Bureau * authors are members of the Department of Economics at Oberlin College. Professors George Andrews, Samuel Goldberg, Robert Solow, James Tobin, Robert Tufts, and Dr. Richard Nelson provided valuable comments on various parts of the study, as did the participants of the Ford Foundation Workshops on Unemployment and Economic Growth. 'The phrase has also been used to describe the hypothesis that favorable economic conditions attract secondary workers into the labor force. In this paper the phrase is used to denote the presumption that adverse economic conditions induce secondary workers to enter the labor force. 2For a survey of the literature, see Herbert S. Parnes, The Labor Force and Labor Markets, in Heneman et al. eds., Employment Relations Research (New York, 1960), 1-42.