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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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    References listed on IDEAS

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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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    5. 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.
    6. Michael W. L. Elsby & Jennifer C. Smith & Jonathan Wadsworth, 2011. "The role of worker flows in the dynamics and distribution of UK unemployment," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(2), pages 338-363.
    7. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-283, June.
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    Cited by:

    1. 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).
    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. 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.
    4. Christopher Ball & Nicolas Groshenny & Ozer Karagedikli & Murat Özbilgin & Finn Robinson, 2024. "How Wages Respond to the Job-Finding and Job-to-Job Transition Rates: Evidence from New Zealand Administrative Data," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 159-180, February.
    5. 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.

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