Unemployment invariance hypothesis, added and discouraged worker effects in Canada

Abstract

PurposeThe purpose of this paper is to explore the long-run relationship between unemployment rate (UR) and labor force participation rate (LFPR) for men and women in Canada. Given that there are differences in the URs and participation rates of men and women, the authors perform separate analysis for them also.Design/methodology/approachThe authors use co-integration analysis to investigate the existence of a long-run relationship between UR and LFPR in Canada using time series monthly data for the past 40 years.FindingsThe finding that there is long-run relationship between UR and LFPR leads the authors to doubt the pertinence of the unemployment invariance hypothesis for Canada. The authors further find evidence for added-worker effect for men and discouraged-worker effect for women in Canada and the authors elaborate on the possible explanations for this seemingly contradictory finding.Practical implicationsThe lack of support for the unemployment invariance hypotheses implies that changes in the participation rate which may be due to aging population, policies of early retirement or constraints on working time will affect the UR in the long run.Originality/valueThis paper investigates the unemployment invariance hypothesis in Canada to come up with policy implications about long-run UR. The authors further elaborate on the possible explanations for the added-worker effect for men and the discouraged-worker effect for women that the authors find in this study.