Labor Market Programs, the Discouraged-Worker Effect, and Labor Force Participation

This paper estimates the macroeconomic effect of labor market programs on labor force participation. Labor market programs could counteract business-cycle variation in the participation rate that is due to the discouraged-worker effect, and they could prevent labor force outflow. An equation that determines the participation rate is estimated using panel data (1986-1998) for Sweden's municipalities. The results indicate that labor market programs have relatively large and positive effects on labor force participation. If the number of participants in labor market programs increases temporarily by 100, the labor force increases by around 63 persons. The effect is temporary so the number of participants in the labor force returns to the old level in the next period. If the number of participants in programs is permanently increased, the labor force increases by around 70 persons. The results indicate that programs prevent labor force outflow because participants who would have left the labor force in the absence of programs are now participating because of the programs. Income and vacancies have positive long- and short-run effects on participation rate. Open unemployment, job destruction rate, and proportion of persons between ages 18-24 and 55-65 have negative long-run effects on the participation rate