Exploring the big jump in the Spanish unemployment rate: Evidence on an ‘added-worker’ effect
Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of f...
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Published in | Economic modelling Vol. 28; no. 3; pp. 1099 - 1105 |
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Main Authors | , , |
Format | Journal Article |
Language | English |
Published |
Amsterdam
Elsevier B.V
01.05.2011
Elsevier Elsevier Science Ltd |
Series | Economic Modelling |
Subjects | |
Online Access | Get full text |
ISSN | 0264-9993 1873-6122 |
DOI | 10.1016/j.econmod.2010.11.018 |
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Abstract | Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the ‘added-worker’ effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the ‘discouraged-worker’ effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976–2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future.
► This paper studies the relationship between unemployment and labour force participation rates, in Spain. ► We employ an econometric framework where unemployment is allowed to influence labour force participation in a non-linear way. ► Our results suggest that the relationship is indeed non-linear. ► We also provide evidence of a positive relationship is also provided but only when the unemployment rate is below 11.7%. |
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AbstractList | Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the 'added-worker' effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the 'discouraged-worker' effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976-2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future. Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the 'added-worker' effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the 'discouraged-worker' effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976-2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future. All rights reserved, Elsevier Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the 'added-worker' effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the 'discouraged-worker' effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976-2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future. [PUBLICATION ABSTRACT] Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the ‘added-worker’ effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the ‘discouraged-worker’ effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976–2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future. ► This paper studies the relationship between unemployment and labour force participation rates, in Spain. ► We employ an econometric framework where unemployment is allowed to influence labour force participation in a non-linear way. ► Our results suggest that the relationship is indeed non-linear. ► We also provide evidence of a positive relationship is also provided but only when the unemployment rate is below 11.7%. |
Author | Golpe, Antonio A. Congregado, Emilio van Stel, André |
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Cites_doi | 10.2307/2297190 10.1016/S0165-1765(00)00375-X 10.2307/2527284 10.2307/2938278 10.1080/00036840050155841 10.1016/S0014-2921(97)00058-5 10.2307/1923979 10.1111/1468-0262.00256 10.1016/0165-1889(88)90041-3 10.1017/S1365100501023057 10.1016/S0304-4076(02)00097-0 10.1016/S0922-1425(00)00049-9 10.1111/1467-6419.00098 10.1111/1468-0297.00034 10.2307/2520560 10.2307/145219 |
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Keywords | Added-worker effect C32 Non-stationarity, Spain Labour force participation Non-linearity Discouraged-worker effect J64 J22 Unemployment Threshold cointegration |
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SubjectTerms | 1976-2008 Added-worker effect Arbeitslosigkeit Byproducts Cointegration Discouraged-worker effect Economic conditions Economic models Employment Erwerbstätigkeit Household income Labor economics Labor force Labor force participation Labour force participation Labour force participation Unemployment Added-worker effect Discouraged-worker effect Threshold cointegration Non-linearity Non-stationarity Labour market participation Measurement Modelling Non-linearity Non-stationarity, Spain Recession Recessions Spain Spanien Studies Threshold cointegration Unemployment Unemployment levels |
Title | Exploring the big jump in the Spanish unemployment rate: Evidence on an ‘added-worker’ effect |
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