Do labor market flows affect labor-force participation?

This study examines if the flow rate from open unemployment to labor market programs affect the labor-force participation rate. This question is relevant because Swedish labor-force participation is expected to decline due to the age distribution in the population. A new dataset, with monthly data from Swedish municipalities between 1991:08 and 2002:10, has been constructed. The results show that increased probability of moving from open unemployment to labor market programs has positive effects on the labor-force participation rate. Positive effects are found for different age groups. The estimated effect of the flow rate from open unemployment into labor market programs is countercyclical. The participation rate is procyclical, and counter-cyclical labor market programs could be used to prevent discouraged workers from leaving labor force. The effects of flow rates from programs to open unemployment, and from the job destruction rate are negative, as expected. Income and labor market tightness have positive effects, except for older participants. This is because it is a spurios negative correlation in data for the older participants. In general, the long run levels are achieved after about nine years, and most of the adjustment takes place during the first four years.

Introduction: Few studies try to answer the question of whether labor market programs affect labor-force participation. This question is important in Sweden because the labor force is expected to decline due to the age distribution in the population. Today, there is a considerable focus on ways of attracting groups outside the labor force into it, for example recipients of social beneļ¬ts, immigrants, and young people who have weak links with the labor market. Ways of retaining older workers in the labor force and attracting people who have left labor force for some reason have also been discussed. Labor market programs could be a factor in attracting new entrants and preventing participants from leaving the labor force.

Author: Kerstin Johansson

Source: Institute for Labour Market Policy Evaluation

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