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Maximum Employment and the Participation Cycle

Author

Listed:
  • Bart Hobijn
  • Ayşegül Şahin
Abstract
We investigate the source, magnitude, and unevenness of the procyclical forces that shape labor force participation, i.e., the participation cycle, which are important for the implementation of the maximum employment mandate. We show that these forces can be analyzed in real time using a flow decomposition of the changes in the labor force participation rate. The decomposition reveals that the source of the participation cycle is fluctuations in job-loss and job-finding rates, rather than cyclical movements in labor force entry and exit rates. The magnitude of the participation cycle is large. Cyclical downward pressures on employment from participation are two-thirds that of unemployment. Moreover, the participation cycle delays the recovery in employment because it lags the unemployment cycle. It also amplifies the unevenness of the impact of recessions. Groups that see large increases in their unemployment rates also experience more pronounced participation cycles. Despite differences in their magnitudes, the source of the participation cycle is the same for all groups. Application of our method to the COVID-19 Recession suggests that, as of June 2021, the bulk of the drop in the participation rate since the onset of the pandemic is cyclical and that the cyclical recovery in participation likely will trail that of the unemployment rate.

Suggested Citation

  • Bart Hobijn & Ayşegül Şahin, 2021. "Maximum Employment and the Participation Cycle," NBER Working Papers 29222, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29222
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    2. Crump, Richard K. & Eusepi, Stefano & Giannoni, Marc & Şahin, Ayşegül, 2024. "The unemployment–inflation trade-off revisited: The Phillips curve in COVID times," Journal of Monetary Economics, Elsevier, vol. 145(S).
    3. Faberman, R. Jason & Mueller, Andreas I. & Şahin, Ayşegül, 2022. "Has the Willingness to Work Fallen during the Covid Pandemic?," Labour Economics, Elsevier, vol. 79(C).
    4. Régis Barnichon & Adam Shapiro, 2024. "Phillips Meets Beveridge," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
    5. Hiroyuki Kubota & Ichiro Muto & Mototsugu Shintani, 2022. "Monetary Policy, Labor Force Participation, and Wage Rigidity," IMES Discussion Paper Series 22-E-17, Institute for Monetary and Economic Studies, Bank of Japan.
    6. David H. Bernstein & Andrew B. Martinez, 2021. "Jointly Modeling Male and Female Labor Participation and Unemployment," Econometrics, MDPI, vol. 9(4), pages 1-14, December.

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    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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