The role of non-participants in labour market dynamics

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Jed Armstrong; Özer Karagedikli

The unemployment rate fluctuates considerably over the business cycle. Most mainstream macroeconomic models treat movements in the unemployment rate as being driven by flows between two states of labour market participation – employment and unemployment. In this paper, we examine the influence of a third labour-market state – those not in the labour force (or non-participants). These are working-age individuals who are neither officially employed or officially unemployed, such as non-working university students, stay-at-home parents, and early retirees.

We explore the role for non-participants in determining labour market outcomes using a dataset called gross flows. Gross flows measure the total number of people who transition between each labour market state each quarter. We find that flows via non-participation account for about two-thirds of the movements in the unemployment rate, which is much higher than in comparable international studies. This suggests non-participants influence the labour market in New Zealand. We find that there is a large pool of potential workers among non-participants, and that this pool of potential workers influences wage determination. Overall, our findings suggest that non-participants can add significant value to our understanding of labour market dynamics.