People marginally attached to the labour force behind participation rate movements

In the early 2000s, when Queensland’s unemployment rate seemed permanently stuck around 1-2 percentage points above the national average, it was common for Premier Beattie and Employment Minister Braddy to note that our relatively higher participation rate placed us at a disadvantage. This was because the Queensland economy needed to produce many more jobs than if workforce participation weren’t so high. Adjusting for our higher participation rate, Queensland’s unemployment rate would have been much closer to the national average.

There is certainly an arithmetic link between the unemployment rate and the participation rate. The unemployment rate is the ratio of the number of unemployed people to the size of the labour force. The size of the labour force is the sum of employed and unemployed persons, and by definition is equal to the participation rate (%) multiplied by the civilian population aged 15 or over. Given these relationships, you can work out what the unemployment rate would be if the participation rate were a different value.

This is relevant to the discussion of more recent labour force data. For example, Queensland’s December 2012 unemployment rate of 6.2% could have been much worse if the participation rate hadn’t fallen from 66.6% to 66.0%. Assuming the December participation rate were instead steady at 66.6%, the unemployment rate would have been 7.1%. Given the volatility in the monthly data, I wouldn’t want to make too much out of this. However, over the last year or so, there has been a downward trend in participation as labour market conditions have worsened, and it appears that lower labour force participation has indeed prevented the unemployment rate from increasing more than it has.

This is not unexpected, as it has been observed for many decades and across many countries that the participation rate will vary with labour market conditions. To a large extent, this is because of the existence of many people (tens of thousands in Queensland I expect) who are marginally attached to the workforce – e.g. students and parents who have left the workforce to raise children. People who are marginally attached might take a job if an attractive one comes along, but they don’t necessarily need to work. When employment growth is strong, the better labour market conditions encourage people who are marginally attached to the workforce to look for work, hence increasing the participation rate. This is the so-called encouraged worker effect. There is also a discouraged worker effect, because when labour force conditions worsen, the marginally attached (and the newly unemployed) can get discouraged from looking for work and hence drop out of the labour force.

Given the encouraged and discouraged worker effects, the participation rate will tend to move in a way that dampens movements in the unemployment rate. This is evident in the Queensland data (see chart below), with the participation rate dropping in periods of weak labour market conditions (i.e. last year and the early 1990s recession) and increasing when labour market conditions were better (i.e. in the years prior to the 2008 financial crisis). Hence there is nothing unexpected or odd about the moderating impact of the recent decline in Queensland’s participation rate on the unemployment rate.

lfdata

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One Response to People marginally attached to the labour force behind participation rate movements

  1. Pingback: Why is Qld’s participation rate higher than the rest of Australia’s? | Queensland Economy Watch

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