Maximum Employment and the Participation Cycle

Bart Hobijn and Aysegul Sahin

No 29222, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate the source, magnitude, and unevenness of the procyclical forces that shape labor force participation, i.e., the participation cycle, which are important for the implementation of the maximum employment mandate. We show that these forces can be analyzed in real time using a flow decomposition of the changes in the labor force participation rate. The decomposition reveals that the source of the participation cycle is fluctuations in job-loss and job-finding rates, rather than cyclical movements in labor force entry and exit rates. The magnitude of the participation cycle is large. Cyclical downward pressures on employment from participation are two-thirds that of unemployment. Moreover, the participation cycle delays the recovery in employment because it lags the unemployment cycle. It also amplifies the unevenness of the impact of recessions. Groups that see large increases in their unemployment rates also experience more pronounced participation cycles. Despite differences in their magnitudes, the source of the participation cycle is the same for all groups. Application of our method to the COVID-19 Recession suggests that, as of June 2021, the bulk of the drop in the participation rate since the onset of the pandemic is cyclical and that the cyclical recovery in participation likely will trail that of the unemployment rate.

JEL-codes: J20 J6 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-isf, nep-lab and nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (9)

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