ARE LABOUR FORCE PARTICIPATION RATES NON-STATIONARY? EVIDENCE FROM 130 YEARS FOR G7 COUNTRIES *

Jakob Madsen, Vinod Mishra and Russell Smyth ()

Australian Economic Papers, 2008, vol. 47, issue 2, pages 166-189

Abstract: This paper applies a unit root test with a non-linear threshold to examine whether labour force participation rates are mean reverting for G7 countries using annual data over a 130 year period. We find some evidence of mean reversion for just over half the sample; however, this result is sensitive to regime shifts. We also examine whether the labour force participation rate is trend reverting through employing a lagrange multiplier (LM) unit root test with one and two structural breaks in the intercept and slope. The LM unit root test provides no additional evidence in support of stationarity. On the basis of the unit root tests for mean reversion we conclude that there is at best mixed evidence that long-term changes in unemployment rates translate into long-term changes in employment rates and that the unemployment rate is a useful indicator of joblessness. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd/University of Adelaide and Flinders University.

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