A new look at the discouragement and the added worker hypotheses: applying a trend–cycle decomposition to unemployment

Abstract

This article proposes an unobserved components approach to disentangle the influence of unemployment on labour participation into a permanent and a cyclical part, connected to discouragement and added worker effect, respectively. By splitting up the participation effect of changes in the unemployment rate, our analysis differs profoundly from previous studies that present the net of both or only a single effect. The results for Germany confirm that both the discouragement and the added worker effect exist, but different age groups respond differently to permanent and transitory changes in the unemployment rate.

Keywords:

• labour participation
• discouragement
• added worker effect
• unobserved components

JEL Classification:

• C32
• E24
• J21

Notes

¹ Age-specific time series for the unemployment rate covering a large sample are not available.

² Unit root test results are available upon request.

³ A significant effect of the unemployment trend on participation implies cointegration. For the three relevant cases given in Table 1, cointegration has additionally been verified by using Johansen trace tests with yearly data.

⁴ Note that some retired persons might seek a job and therefore count to the labour force.