World of Work Report 2013 - International Labour Organization

Box 1.2 Cyclical sensitivity of the labour force participation rate
Labour force participation rates (the share of the working-age population that engages actively in the
labour market, either by working or by seeking employment) decreased between 2007 and 2012 in more
than half of the countries analysed. This decline in the labour force participation rate could be the result of
two effects: (i) changes in the working-age population (i.e. a structural effect); or (ii) change in individuals’
decisions in response to the situation in the labour market (i.e. a cyclical effect).
An extensive literature has concentrated on the decrease in the labour force participation rate due to
structural factors such as the ageing of the population. Most of the empirical evidence suggests that the
age distribution of the population is gradually shifting upwards, toward more older people, and this has
a clearly adverse effect on overall participation rates (Börsch-Supan, 2003; Burniaux et al., 2003). This
effect can be isolated by estimating what the overall participation rate would have been if the age distribution
of the population had remained as it was in 2007. Thus, the difference between the actual labour
participation rate and this estimated rate measures the change in the participation rate due to structural
factors. a Following Van Zandweghe (2012), the labour force participation rate in a given year t is:
LFPR t = S t
15–24
× LFPR t
15–24
+ S t
25–54
× LFPR t
25–54
+ S t
55+
× LFPR t
55+
where LFPR t
15–24
, LFPR t
25–54
and LFPR t
55+
represent labour force participation rates for people aged 15 to
24, 25 to 54 and 55 or older, respectively. The weights S t
15–24
, S t
25–54
and S t
55+
are the population shares
of the three age groups. If the age distribution of the population had remained at its 2007 levels, the
participation rate would have been:
15–24 15–24 25–54 25–54 55+ 55+
LFPR t,07 = S t,07 × LFPR t,07 + S t,07 × LFPR t,07 + S t,07 × LFPR t,07
15–24 15–24 55+
where S t,07 , S t,07 and S t,07 represent the population shares in 2007 for the three groups of age. The difference
between LFPR t and LFPR t,07 measures the change in the participation rate due to structural changes.
Applying the above methodology to the selected countries for the period 2007 to 2012 leads to the
following conclusions:
● In those countries where labour force participation rates declined most sharply (by a full percentage
point or more), on average around one-quarter of the decline was due to the cyclical effect and the
remaining three-quarters, to structural changes in the population–i.e. due to an ageing population.
Overall, without this cyclical effect, the labour force participation rate would have been 0.3percentage
points higher (figure1.4, panelA).
● Nevertheless, the effect of the cyclical component is significantly greater in some countries. In Denmark
and the United States, the cyclical component accounted for more than 50per cent and 40per
cent, respectively, of the changes in the labour force participation rate. Moreover, if the people who
made up the cyclical decline in the labour force participation rate were in the labour force and counted
as unemployed, the unemployment rate would now be significantly higher. In fact, the overall unemployment
rate for the selected countries would have been 7.4per cent in 2012 instead of 6.9per
cent (figure1.4, panelB).
Disentangling the roles of the cyclical and structural factors in explaining the decline in participation rates
matters in terms of policy options. For example, if the labour force participation rate decline is mainly
due to structural factors, a jobs recovery would not draw workers into the labour market. This suggests
… and problems of job quality are seen in a number of countries
The global crisis has been accompanied by deterioration in the quality of employment
in a number of countries. The World of Work Report 2012 showed that between 2007
and 2010, the incidence of both involuntary temporary and part-time employment
increased in 80 per cent and 85 per cent of the advanced economies analysed,
respectively.13 Since 2010, involuntary temporary and part-time employment has
increased in many countries where employment growth has resumed.14 The shares
10
13. ILO (2012).
14. In this regard, underemployment (i.e. the number of workers willing to work extra hours as a
share of the workforce) has become an important feature of the current crisis. See for example, Bell
and Blanchflower (2013).
World of Work Report 2013: Repairing the economic and social fabric