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International Monetary Fund. Western Hemisphere Dept.

structural changes ( Aaronson et al, 2006 ). For example, it’s not easy to predict what will happen to college enrollment. Will it continue the very recent decline as job prospects improve and the cost of college goes up, or will a rising skill premium encourage further enrollments? For older workers, which forces will dominate: increasing wealth or rising longevity and better health? And how do we forecast longevity and health? Labor Market Slack 35. Estimation of a trend LFPR and forecasting the actual one allows construction of a broader measure of labor market

Mr. Francesco Grigoli, Zsoka Koczan, and Petia Topalova
Advanced economies are in the midst of a major demographic transition, with the number of elderly rising precipitously relative to the working-age population. Yet, despite the acceleration in demographic shifts in the past decade, advanced economies experienced markedly different trajectories in overall labor force participation rates and the workforce attachment of men and women. Using a cohort-based model of labor force participation for 17 advanced economies estimated over the 1985-2016 period, we document a significant role of common patterns of participation over the life cycle and shifts in these patterns across generations for aggregate labor supply, especially in the case of women. The entry of new cohorts of women led to upward shifts in the age participation prole, boosting aggregate participation rates. However, this process plateaued in most advanced economies, with signs of reversal in some. Using the model's results to forecast future participation trends, we project sizable declines in aggregate participation rates over the next three decades due to the aging of the population. Illustrative simulations show that implementing policies encouraging labor supply can help attenuate but may not fully offset demographic pressures.
Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook
The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).

and Cyclical Effects 3.2 Age and Cohort Effects in Labor Force Participation Rates 3.3 Illustrative Simulations 3.4 Robustness 4 Conclusions References A Country-Specific Estimates B Calculation of the Cyclical Effects List of Figures 1 Demographic Transition in AEs Compared to EMDEs 2 Changes in LFPR over 2008–16 3 LFPR by Gender 4 Changes in LFPR by Gender Since 2008: The Role of Aging and Cyclical Effects 5 Age Effects 6 Cohort Effects 7 Trend Projection of LFPR 8 Changes in Trend LFPR Under Alternative Scenarios A.1 Age

, International Monetary Fund . Appendix A. Country-Specific Estimates Figure A.1: Age Effects by Country (Percent) Source: Authors’ calculations. Notes: The red and blue lines denote the men and women age effects, respectively. Figure A.2: Cohort Effects by Country (Percent) Source: Authors’ calculations. Notes: The red and blue lines denote the men and women age effects, respectively Figure A.3: Actual and Trend LFPR by Country (Percent) Source: Authors’ calculations. Notes: The black lines denote actual participation

in the estimated cohort effects for the cohorts that enter only one age group. 6 2.4 Forecast and Simulations To forecast future LFPR, we draw on the results of the cohort-based model and combine them with projected demographic changes from the United Nations. To do so, we first calculate the age group- and gender-specific trend LFPR, l t a , g , * , consistent with a closed output gap as: l t a , g , * = α ^ a , g + 1 n g Σ t − g T β ^ a , g C t − g a ( 4 ) We then aggregate the age group- and gender-specific trends using projected population

Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook

-aging components recover. B. Labor Market Slack Estimation of a trend LFPR and forecasting the actual one allows construction of a broader measure of labor market slack. The BLS produces various measures of labor market slack in addition to the unemployment rate ( Figure 18 ). The broadest measure includes marginally attached workers and those working part time for economic reasons. This shows that while the unemployment rate has fallen to well within 1 percentage point of most estimates of the NAIRU, substantial slack still exists, especially given the number of part

International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper on the United States of America examines the recent US labor force penetration rate (LFPR) dynamics. LFPR dynamics can be driven by structural factors and cyclical ones related to job prospects. With participation rates for older workers lower than for prime age workers, demographic models suggest that aging of the baby boom generation explains about 50 percent of the near 3p.p. LFPR decline during 2007–2013. State-level panel regression analysis is used to tie down the cyclical effect, which is estimated to account for about 30–40 percent of the decline. Significant remaining slack in the labor market points to an important role for macroeconomic and labor supply policies. This suggests a still important role for stimulative macroeconomic policies to help reach full employment. Macroeconomic policy should remain accommodative for a while given sizeable labor market slack. This slack goes beyond that signaled by the unemployment rate and takes account of the LFPR being below trend and many employees working part time ‘involuntarily’.