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The Effects of Downturns on Labour Force Participation: Evidence and Causes

Author

Listed:
  • Romain Duval

    (OECD)

  • Mehmet Eris

    (OECD)

  • Davide Furceri

    (OECD)

Abstract

This paper uses an impulse-response function approach to assess the magnitude and persistence of the effects of downturns on labour force participation for a sample of 30 countries over the period 1960-2008. Past severe recessions appear to have had a significant and persistent impact on participation, while moderate downturns did not. The aggregate participation rate effect of severe downturns peaked on average at about 1½ to 2½ percentage points five to eight years after the cyclical peak, and was still significant after almost a decade. Youths and older workers account for the bulk of this effect. Institutional and policy settings are found to be an important factor having shaped the response of participation to economic downturns. In particular, early retirement incentives embedded in old-age pension schemes and other social transfer programmes are found to amplify the responsiveness of older workers’ participation to economic conditions. However, the findings in this paper do not seem to apply to the most recent crisis, partly because the labour market situation did not deteriorate as much as the magnitude of the recession would have suggested in a number of OECD countries. Les effets des retournements de conjoncture sur la participation au marché du travail : Evidence et causes Cet article utilise une approche impulsion-réponse pour évaluer l’ampleur et la persistance des effets des retournements de conjoncture sur la participation au marché du travail pour un échantillon de 30 pays de l’OCDE sur la période 1960-2008. Il apparaît que les récessions sévères ont eu un impact significatif et persistant sur la participation dans le passé, au contraire des retournements de cycle plus modérés. L’effet agrégé des récessions sévères sur la participation a atteint un pic de 1½ à 2½ points de pourcentage cinq à huit ans après le point haut du cycle, et était toujours significatif après presque une décennie. Les jeunes et les seniors ont contribué à l’essentiel de cet effet. Les facteurs politiques et institutionnels jouent un rôle important dans la réponse de la participation aux retournements conjoncturels. En particulier, il apparaît que les incitations au départ anticipé à la retraite contenues dans les régimes de retraite et les autres systèmes de transferts sociaux accroissent la sensibilité de la participation des seniors aux conditions économiques. Pour autant, les résultats de cet article ne semblent pas s’appliquer à la crise récente, en partie parce que la situation du marché du travail ne s’est pas détériorée autant que l’ampleur de la récession aurait pu le suggérer dans un certain nombre de pays de l’OCDE.

Suggested Citation

  • Romain Duval & Mehmet Eris & Davide Furceri, 2011. "The Effects of Downturns on Labour Force Participation: Evidence and Causes," OECD Economics Department Working Papers 875, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:875-en
    DOI: 10.1787/5kg9q0nmbws8-en
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    Cited by:

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    2. Bernal-Verdugo, Lorenzo E. & Furceri, Davide & Guillaume, Dominique, 2013. "Banking crises, labor reforms, and unemployment," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1202-1219.
    3. Mourougane, Annabelle, 2017. "Crisis, potential output and hysteresis," International Economics, Elsevier, vol. 149(C), pages 1-14.
    4. Sinem Kilic Celik & M. Ayhan Kose & Franziska Ohnsorge & F. Ulrich Ruch, 2023. "Potential Growth: A Global Database," CAMA Working Papers 2023-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Davide Furceri & Mr. Lorenzo E. Bernal-Verdugo & Mr. Dominique M. Guillaume, 2012. "Crises, Labor Market Policy, and Unemployment," IMF Working Papers 2012/065, International Monetary Fund.
    6. Teimouri, Sheida & Dutta, Nabamita, 2016. "Investment and bank credit recovery after banking crises," Journal of Financial Stability, Elsevier, vol. 26(C), pages 306-327.
    7. Romain Bouis & Ane Kathrine Christensen & Boris Cournède, 2013. "Deleveraging: Challenges, Progress and Policies," OECD Economics Department Working Papers 1077, OECD Publishing.
    8. Filges, Trine & Larsen, Mona & Pedersen, Peder J., 2012. "Retirement: Does Individual Unemployment Matter? Evidence from Danish Panel Data 1980–2009," IZA Discussion Papers 6538, Institute of Labor Economics (IZA).
    9. Åsa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Philip Bagnoli & Guillaume Bousquet & Francesca Spinelli, 2013. "Long-Term Growth Scenarios," OECD Economics Department Working Papers 1000, OECD Publishing.
    10. Druant, Martine & Vanhala, Juuso & Ktoris, Michalis & Jarvis, Valerie & Bouchet, Muriel & Budnik, Katarzyna & Childs, Claire & Kuttner, Nicole & Spooner, Magdalena & De Mulder, Jan & Bonthuis, Boele &, 2012. "Euro area labour markets and the crisis," Occasional Paper Series 138, European Central Bank.
    11. Wei-Bin Zhang, 2021. "Corruption and Growth in a Dynamic General Equilibrium Model," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 3, May - Aug.
    12. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, vol. 40(12), pages 2369-2378.
    13. Task Force of the Monetary Policy Committee of the European System of Central Banks, 2012. "Euro area labour markets and the crisis," Occasional Paper Series 138, European Central Bank.

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    More about this item

    Keywords

    crise; crisis; downturn; hysteresis; hystérésis; labour force participation; participation au marché du travail; recession; retirement; retournements de conjoncture; retraites; récession;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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