Separating aggregate discouraged and added worker effects: the case of a former transition country

Authors

DOI:

https://doi.org/10.24136/oc.2021.024

Keywords:

discouraged worker effect, added worker effect, vector autoregression, sign restrictions

Abstract

Research background: We analyse the added worker effect (AWE) and the discouraged worker effect (DWE) from an aggregate perspective. The first effect refers to an increase in labour force participation in response to a decrease in the wage rate. The second effect refers to the decision by workers who have been unsuccessful in their job search to leave the labour market or to decrease their labour force participation. For our analysis, we use the case of Poland, a country with a persistently low labour force participation rate.

Purpose of the article: While previous studies focused on the net of the two effects, we aim to analyse the two effects both separately and simultaneously. We propose a new approach for analysing the two effects. We generalise and model them as resulting from different shocks: (i) the AWE as the result of a negative wage income shock, and (ii) the DWE as the result of a positive job search time shock. The underlying assumption is that both shocks have at least a transitory effect on the labour force participation rate. However, we also track the potential long-lasting effects of these shocks, and we analyse the reactions of gender and age groups to them. While this approach demonstrates the robustness of our results, it also provides the range of the sensitivity, as it shows that there are large differences in the magnitude of the AWE and the DWE for different labour market cohorts.

Methods: We use the multivariate unobserved component model to extract the AWE and the DWE, and we then use VAR models, applying sign and exclusion restrictions to model the underlying shocks. We use quarterly data for Poland in 1995?2019. Most of these data come from the Labour Force Survey, while the rest come from Statistics Poland.

Findings & value added: In contrast to previous literature, which analysed only the net effect of the two effects, we model the AWE and the DWE separately. Contrary to the findings of previous research, our approach seems to confirm that both effects are simultaneously present in the labour market, and both effects influence the labour force participation rate. Thus, we find that both effects are significant. Specifically, we show that the AWE is stronger, but transitory; while the DWE is weaker, but long-lasting.

Downloads

Download data is not yet available.

References

Agell, J. (1999). On the benefits from rigid labour markets: norms, market failures, and social insurance. Economic Journal, 109(453), 143?164.

DOI: https://doi.org/10.1111/1468-0297.00406
View in Google Scholar

Altavilla, C., Garofalo, A., & Vinci, C.P. (2005). Is the discouraged worker effect time-varying? CELPE Discussion Papers, 97.
View in Google Scholar

Altuzarra, A., Gálvez Gálvez, C., & González Flores, A. (2019). Unemployment and labour force participation in Spain. Applied Economics Letters, 26(5), 345?350. doi: 10.1080/13504851.2018.14703.

DOI: https://doi.org/10.1080/13504851.2018.1470312
View in Google Scholar

Baslevent, C., & Onaran, O. (2003). Are married women in Turkey more likely to become added or discouraged workers? Labour, 17(3), 439?458.

DOI: https://doi.org/10.1111/1467-9914.00248
View in Google Scholar

Benati, L. (2001). Some empirical evidence on the 'discouraged worker' effect, Economics Letters, 70(3), 387?395. doi: 10.1016/S0165-1765(00)00375-X.

DOI: https://doi.org/10.1016/S0165-1765(00)00375-X
View in Google Scholar

Bredtmann, J., Otten, S., & Rulff, C. (2018). Husband?s unemployment and wife?s labor supply: the added worker effect across Europe. ILR Review, 71(5), 1201?1231. doi: 10.1177/0019793917739617.

DOI: https://doi.org/10.1177/0019793917739617
View in Google Scholar

Battalio, R. C., Green, L., & Kagel, J. H. (1981). Income-leisure tradeoffs of animal workers. American Economic Review, 71(4), 621?632.
View in Google Scholar

Coglianese, J. (2018). The rise of in-and-outs: declining labor force participation of prime age men. Harvard University. Retrieved from https://scholar.harvard.edu/ files/coglianese/files/coglianese_2017_in-and-outs. pdf.
View in Google Scholar

Congregado, E., Golpe, A., & van Stel, A. (2011). Exploring the big jump in the Spanish unemployment rate: evidence on an ?added worker effect?. Economic Modelling, 28(3), 1099?1105. doi: 10.1016/j.econmod.2010.11.018.

DOI: https://doi.org/10.1016/j.econmod.2010.11.018
View in Google Scholar

Congregado, E., Golpe, A. A., & Carmona, M. (2012). Unemployment invariance hypothesis and structural breaks. Empirical Economics Letters, 11(5).
View in Google Scholar

Congregado, E., Carmona, M., Golpe, A., & van Stel, A. (2014). Unemployment, gender and labor force participation in Spain: future trends in labor market. Romanian Journal of Economic Forecasting, 17(1), 53?66.
View in Google Scholar

Congregado, E., Gałecka-Burdziak, E., Golpe, A., & Pater, R. (2020). Asymmetry and non-linearity in discouraged and added worker effects. Eastern European Economics, 58(3), 221?241. doi: 10.1080/00128775.2019.1710215.

DOI: https://doi.org/10.1080/00128775.2019.1710215
View in Google Scholar

Congregado, E., Gałecka-Burdziak, E., Golpe, A. A., & Pater, R. (2021). Unemployment invariance hypothesis and structural breaks in Poland. Journal of Economic Asymmetries, 24, e00198. doi: 10.1016/j.jeca.2021.e00198.

DOI: https://doi.org/10.1016/j.jeca.2021.e00198
View in Google Scholar

Dagsvik, J., Kornstad, T., & Skjerpen T. (2006). Analysis of the discouraged worker phenomenon. Evidence from micro data. Discussion Papers. Statistics Norway, Research Department, 453,.
View in Google Scholar

Dagsvik, J., Kornstad, T., & Skjerpen, T. (2013). Labor force participation and the discouraged worker effect. Empirical Economics, 45, 401?433. doi: 10.1007/s 00181-012-0598-9.

DOI: https://doi.org/10.1007/s00181-012-0598-9
View in Google Scholar

Danne, C. (2015). VARsignR: Estimating VARs using sign restrictions in R. MPRA, 68429.
View in Google Scholar

Darby, J., Hart, R., & Vecchi, M. (1998). Labour force participation and the business cycle: a comparative analysis of Europe, Japan and the United States. Working Papers, Business School ? Economics, University of Glasgow, 9802.
View in Google Scholar

Ehrenberg, R. G., & Smith, R. S. (2006). Modern labor economics: theory and public policy. Utgave.
View in Google Scholar

Emerson, J. (2011). Unemployment and labor force participation in the United States. Economics Letters, 111(3), 203?206. doi: 10.1016/j.econlet.2011.02. 022.

DOI: https://doi.org/10.1016/j.econlet.2011.02.022
View in Google Scholar

Euwals, R., Knoef, M., & van Vuuren, D. (2011). The trend in female labour force participation: what can be expected for the future? Empirical Economics, 40(3), 729?753. doi: 10.1007/s00181-010-0364-9.

DOI: https://doi.org/10.1007/s00181-010-0364-9
View in Google Scholar

Evans, A. (2018). Evidence of the added-worker and discouraged-worker effects in Australia. International Review of Applied Economics, 32(4), 472?488. doi: 10.1080/02692171.2017.1351530.

DOI: https://doi.org/10.1080/02692171.2017.1351530
View in Google Scholar

Filatriau, O., & Reynes, F. A. (2012). New estimate of discouraged and additional worker effects on labor participation by sex and age in OECD countries. OFCE Document de travail, 2012-09.
View in Google Scholar

Finegan, T. (1981). Discouraged workers and economic fluctuations. Industrial and Labor Relations Review, 35(1), 88?102. doi: 10.2307/2523144.

DOI: https://doi.org/10.1177/001979398103500108
View in Google Scholar

Fry, R., & Pagan, A. (2011). Sign restrictions in structural vector autoregressions: a critical review. Journal of Economic Literature, 49(4), 938?960. doi: 10.1257 /jel.49.4.938.

DOI: https://doi.org/10.1257/jel.49.4.938
View in Google Scholar

Fuchs, J., & Weber, E. (2013). A new look at the discouragement and the added worker effect hypotheses: applying a trend-cycle decomposition to unemployment. Applied Economic Letters, 20(15), 1374?1378. doi: 10.1080/13504851.2 013.812777.

DOI: https://doi.org/10.1080/13504851.2013.812777
View in Google Scholar

Gałecka-Burdziak, E., & Pater, R. (2016). Discouraged or added worker effect? Which one prevails in the Polish labour market? Acta Oeconomica, 66(3), 491?507. doi: 10.1556/032.2016.66.3.6.

DOI: https://doi.org/10.1556/032.2016.66.3.6
View in Google Scholar

Guner, N., Kulikova, Y., & Valladares-Esteban, A. (2020). Does the added worker effect matter? IZA Discussion Paper, 12923.

DOI: https://doi.org/10.2139/ssrn.3525251
View in Google Scholar

Harvey, A. C. (1989). Forecasting structural time series models and the Kalman filter. Cambridge: Cambridge University Press.

DOI: https://doi.org/10.1017/CBO9781107049994
View in Google Scholar

Kakinaka, M., & Miyamoto, H. (2012). Unemployment and labor force participation in Japan. Applied Economic Letters, 19(11), 1039?1043.

DOI: https://doi.org/10.1080/13504851.2011.613742
View in Google Scholar

Kaldor, N. (1957). A model of economic growth. Economic Journal, 67(268), 591?624.

DOI: https://doi.org/10.2307/2227704
View in Google Scholar

Karaoglan, D., & Okten, C. (2015). Labor-force participation of married women in Turkey: a study of the added-worker effect and the discouraged-worker effect. Emerging Markets Finance and Trade, 51(1), 274?290, doi: 10.1080/154049 6X.2015.1011535.

DOI: https://doi.org/10.1080/1540496X.2015.1011535
View in Google Scholar

Koopman, S. J., Harvey, A. C., Doornik, J. A., & Shephard, N. (2009). Structural time series analyser, modeller and predictor STAMP? 8.2. London: Timberlake Consultants.
View in Google Scholar

Lee, G., & Parasnis, J. (2014). Discouraged workers in developed countries and added workers in developing countries? Unemployment rate and labour force participation. Economic Modelling, 41, 90?98. doi: 10.1016/j.econmod.2014 .04.005.

DOI: https://doi.org/10.1016/j.econmod.2014.04.005
View in Google Scholar

Lundberg, S. (1985). The added worker effect. Journal of Labor Economics, 3(1), 11?37.

DOI: https://doi.org/10.1086/298069
View in Google Scholar

Magda, I., Kiełczewska, A., & Brandtc, N. (2020). The effect of child benefit on female labor supply. IZA Journal of Labor Policy, 10(1), doi: 10.2478/izajolp-2020-0017.

DOI: https://doi.org/10.2478/izajolp-2020-0017
View in Google Scholar

Mankart, J., & Oikonomou, R. (2016). The rise of the added worker effect. Economics Letters, 143, 48?51. doi: 10.1016/j.econlet.2016.03.019.

DOI: https://doi.org/10.1016/j.econlet.2016.03.019
View in Google Scholar

Martín-Román, Á. L. (2020). Beyond the added-worker and the discouraged worker effects: the entitled-worker effect. GLO Discussion Paper, 707.
View in Google Scholar

McConnell, C. R., Brue, S. L., & MacPherson, D. A. (2006). Contemporary labor economics. International edition. McGraw Hill Irwin.
View in Google Scholar

Narayanan, S., Das, U., Liu, Y., & Barrett, C. B. (2017). The ?discouraged worker effect? in public works programs: evidence from the MGNREGA in India. World Development, 100, 31?44. doi: 10.1016/j.worlddev.2017.07.024.

DOI: https://doi.org/10.1016/j.worlddev.2017.07.024
View in Google Scholar

O?Brien, M. (2011). Discouraged older male workers and the discouraged worker effect. Australian Journal of Labour Economics, 14(3), 217?235.
View in Google Scholar

Österholm, P. (2010). Unemployment and labour-force participation in Sweden. Economics Letters, 106(3), 205?208. doi: 10.1016/j.econlet.2009.12.002.

DOI: https://doi.org/10.1016/j.econlet.2009.12.002
View in Google Scholar

Pater, R. (2014). Are there two types of business cycles? A note on crisis detection. e-finanse, 10(3), 1?28. doi: 10.14636/1734-039X_10_3_004.
View in Google Scholar

Rubio-Ramirez, J. F., Waggoner, D., & Zha, T. (2010). Structural vector autoregressions: theory of identification and algorithms for inference. Review of Economic Studies, 77(2), 665?696. doi: 10.1111/j.1467-937X.2009.00578.x.

DOI: https://doi.org/10.1111/j.1467-937X.2009.00578.x
View in Google Scholar

Schweitzer, S. O., & Smith, R. E. (1974). The persistence of the discouraged worker effect. ILR Review, 27(2), 249?260.

DOI: https://doi.org/10.1177/001979397402700207
View in Google Scholar

Stephens, M. (2001). Worker displacement and the added worker effect. NBER Working Paper, 8260.

DOI: https://doi.org/10.3386/w8260
View in Google Scholar

Tansel, A., & Ozdemir, Z. A. (2018). Unemployment invariance hypothesis, added and discouraged worker effects in Canada. International Journal of Manpower, 39(7), 929?936. doi: 10.1108/IJM-04-2017-0059.

DOI: https://doi.org/10.1108/IJM-04-2017-0059
View in Google Scholar

Van Ham, M., Mulder, C. H., & Hooimeijer, P. (2001). Local underemployment and the discouraged worker effect Urban Studies, 38(10), 1733?1751.

DOI: https://doi.org/10.1080/00420980120084831
View in Google Scholar

Downloads

Published

2021-09-27

How to Cite

Congregado, E., Gałecka-Burdziak, E., Golpe, A. A., & Pater, R. (2021). Separating aggregate discouraged and added worker effects: the case of a former transition country. Oeconomia Copernicana, 12(3), 729–760. https://doi.org/10.24136/oc.2021.024

Issue

Section

Articles