The response of the labor force to fluctuations in unemployment has been discussed for decades. Especially the labor supply of females seems to be affected by the de- mand side, or by the business cycle. The question of the relationship between cycli- cal variations in economic activity and labor force participation was typically exam- ined under the dichotomy of the discouragement hypothesis vs. the added worker effect.
According to the discouragement hypothesis workers withdraw from a deteriorating labor market. Following a search-theoretical interpreta- tion, a person who becomes unemployed can be expected to give up looking for work as it does not pay off.
On the other hand, additional labor force participants may enter the labor market, especially to ensure their family income. This “added worker effect” is often discussed in the context of the labor mar- ket regime of females as secondary workers.
Empirical studies have produced discordant results. The literature concerning the added worker effect (AWE) provides evidence of a small but significant influence in most but not all cases.
We sharpen tests for “discouragement” and “added worker” effects by splitting the explanatory variable – the unemployment rate – into a short-term and a long-term component. While short-term unemployment might not result in additional workers on a large scale, long-term unemployment reduces household income more, increasing the need for additional income. On the other hand, it may discourage older workers for psychological and sociological reasons.
We analyzed the influence of long-term and short-term unemployment on labor force participation in Germany. Following the literature we expected short-term unemployment not to result in additional workers in general. In this respect, the discouragement effect should be stronger. Long-term unemployment, however, might reduce household income more strongly, thereby increasing the need for additional income. On the other hand, it may discourage especially older workers for psycho- logical and sociological reasons.
The estimations were conducted according to age and sex. The coefficients for both the short-term and the long-term unemployment variables are significant for most groups. Even for men, about whom only few empirical studies on this issue are available, distinguishing between short-term and long-term unemployment reveals discouragement effects. This applies especially for older workers.
In conclusion, short-term unemployment seems to discourage workers across all age groups and both sexes, but differs with respect to the magnitude of the effects. We suspect that this pattern should be seen within the possibility of “alternative” roles (sickness, disability, student).
According to our estimations medium-age and older male workers are discouraged by long-term unemployment after some time. For older women the influence is simi- larly delayed. This can be explained by the institutional framework. In Germany, older unemployed individuals were permitted to retire earlier during the period under investigation. When entitlement to unemployment compensation expires14, early retirement schemes provide an incentive to exit from the labor market.
Long-term unemployment increases the labor force participation of men aged 25-39 and women aged 30-34. The AWE of the 25-39-year-old men might be a result of shorter scheduled further training programs or shorter long-term sickness periods (or few longer sickness periods). For the youngest in these groups, the time spent in education should be seen as relevant.
For women this AWE could be expected under the “secondary worker hypothesis”. However, it must be borne in mind that family formation is an additional interesting aspect (the average age at which a women gives birth in Germany is 30). The part- ner experiencing a longer period of unemployment may threaten the family income, so shorter periods of childcare leave would be an option for some women. With the labor force participation rate of women aged 30-34 reaching almost 79 %, a mutual partnership model could be a more appropriate explanation for Germany than the “secondary worker model” – though it should be noted that more than half of all fe- male workers only work part-time.
Chosen excerpts by Job Market Monitor. Read the whole story at Long-term unemployment and labor force participation: a decomposition of unemployment to test for the discouragement and added worker hypotheses