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Licensed Unlicensed Requires Authentication Published by De Gruyter Oldenbourg September 26, 2017

The Empirics of Hidden Labor Force Dynamics in Germany

Sandro Provenzano

Abstract

The unemployment rate is the core indicator when researchers and policy-makers assess the level of underemployment in an economy. However, accumulating evidence suggests that the unemployment rate is biased and underestimates the true level of underemployment. Closing this gap is especially important because the distortion systematically changes along the business cycle and affects the various subgroups of the population differently. Neglecting these effects when setting up policies might flaw its effectiveness and result in unexpected outcomes. Although the existence of these effects is widely agreed upon only little is known about the magnitude of these effects across various subgroups. Using a highly disaggregated dataset from Germany, this study examines the dynamics in labor force participation that go beyond the unemployment rate. Ample evidence is found that the discouraged and the added worker effect significantly affect particular subgroups in the German labor market. In addition, the discouraged and the added worker effect are generally found to be very symmetric in economic upturns and downturns. Moreover, the labor market reforms in Germany between 2003 and 2005 are found to have reduced the discouraged worker effect on average by 25%, leaving the added worker effect unchanged.

Acknowledgment

I would like to express my gratitude to Jesus Crespo Cuaresma for invaluable and constructive feedback and support. Further, I wish to thank the ifo Center for Business Cycle Analysis and Surveys for the collaboration during the early stages of the study, and the German Federal Statistical Office for the provision of the data. Last but not least, I want to thank Peter Winker and two anonymous referees for insightful comments.

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Appendix

A.1 The labor force participation rate over time

Figure 10: The labor force participation rate and the unemployment rate over time.Note: The labor force participation rate (LFPR) relates to the total population of working age. UR is the unemployment rate.

Figure 10:

The labor force participation rate and the unemployment rate over time.

Note: The labor force participation rate (LFPR) relates to the total population of working age. UR is the unemployment rate.

Figure 11: The labor force participation rate by age and sex.Note: The linear time trends are indicated in black.

Figure 11:

The labor force participation rate by age and sex.

Note: The linear time trends are indicated in black.

Figure 12: The labor force participation rate by citizenship and sex.Note: The linear time trends are indicated in black.

Figure 12:

The labor force participation rate by citizenship and sex.

Note: The linear time trends are indicated in black.

Figure A.1: The labor force participation rate by region and sex.Note: The linear time trends are indicated in black.

Figure A.1:

The labor force participation rate by region and sex.

Note: The linear time trends are indicated in black.

A.2 The hidden labor force disaggregated

Table 6:

Hidden labor force shares over time.

Discouraged workersAdded workers
19912000201020141991200020102014
Men0.410.440.440.440.130.140.110.11
Women0.590.560.560.560.870.860.890.89
Germans0.870.860.810.831111
Non-Germans0.130.140.190.170000
Western Germans0.740.760.780.760.990.990.990.99
Eastern Germans0.260.240.220.240.010.010.010.01
Young0.140.100.130.110.100.070.080.08
Medium0.040.030.050.040.900.930.920.92
Old0.820.860.830.850000

  1. Note: This table contains the shares over time of aggregated sociodemographic groups among the discouraged and the added workers.

A.3 Hidden labor force estimates

Table 7:

Estimates over time.

YearPopDWAWHLFURLoUΔLFPRPLFPRΔ
199154,7396383502886.97.60.771.371.90.5
199254,9967584183417.78.50.871.071.60.6
199355,4019305184128.99.91.070.771.40.7
199455,33810215784429.610.61.070.971.70.8
199555,28210085624469.410.41.070.571.30.8
199655,507118864953910.411.61.270.471.41.0
199755,639139273166111.412.91.570.771.91.2
199855,637141370970311.112.71.670.772.01.3
199955,604138366072310.512.11.671.172.41.3
200055,42612755866899.611.11.571.072.21.2
200155,30512525726809.410.91.571.572.81.2
200255,22313406047369.811.41.671.773.01.3
200355,051143365677710.512.11.672.273.61.4
200454,763139364474910.512.11.672.373.71.4
200555,116127266660711.713.01.373.774.81.1
200654,844104858446410.811.81.074.975.70.8
200754,53677343433899.70.775.576.10.6
200854,3765943372577.88.40.675.876.30.5
200954,0886343552798.18.70.676.276.70.5
201053,8845953222737.78.30.676.577.00.5
201152,6055202742477.17.60.577.177.60.5
201252,7234932502436.87.30.577.077.50.5
201352,8315242562686.97.50.677.477.90.5
201452,9555002412596.77.30.677.578.00.5

  1. Note: Column 2–5 are in thousands. Column 6–11 are in percent\percentage points. ‘Pop’ - ‘Total Population between 15 and 64’. ‘DW’ - ‘Discouraged Workers’. ‘AW’ - ‘Added Workers’. ‘HLF’ - ‘Hidden Labor Force’. ‘UR’ - ‘Unemployment Rate’. ‘LoU’ - ‘Level of Underemployment’ (=registered unemployed Pop.+HLFregistered unemployed Pop.+HLF+employed Pop.). ‘LFPR’ - ‘Labor Force Participation Rate’. ‘PLFPR’ - ‘Potential Labor Force Participation Rate’.

Received: 2016-8-20
Revised: 2017-3-27
Accepted: 2017-8-27
Published Online: 2017-9-26
Published in Print: 2017-11-27

© 2017 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston