The Effects of Downturns on Labour Force Participation

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.