Long-term unemployment and labor force participation: A decomposition of unemployment to test for the discouragement and added worker hypotheses

We sharpen tests for "discouragement" and "added worker" effects by splitting the explanatory variable - the unemployment rate - into a short-term and a long-term component. While short-term unemployment might not result in additional workers on a large scale, long-term unemployment reduces household income more, increasing the need for additional income. On the other hand, it may discourage older workers for psychological and sociological reasons. Applying our model to the German labor market, these hypotheses could be confirmed. Even for men, about whom only few empirical studies on this issue are available, distinguishing between short-term and long-term unemployment reveals discouragement effects.