Drivers of Labor Force Participation in Advanced Economies: Macro and Micro Evidence

Author/Editor:

Francesco Grigoli ; Zsoka Koczan ; Petia Topalova

Publication Date:

June 25, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Despite signicant headwinds from population aging in most advanced economies (AEs), labor force participation rates show remarkably divergent trajectories both across countries and across dierent groups of workers. Participation increased sharply among prime-age women and, more recently, older workers, but fell among the young and prime-age men. This pa- per investigates the determinants of these trends using aggregate and individual-level data. We nd that the bulk of the dramatic increase in the labor force attachment of prime-age women and older workers in the past three decades can be explained by changes in labor mar- ket policies and institutions, structural transformation, and gains in educational attainment. Technological advances such as automation, on the other hand, weighed on the labor supply of prime-age and older workers. In light of the dramatic demographic shifts expected in the coming decades in many AEs, our ndings underscore the need to invest in education and training, reform the tax system, reduce early retirement incentives, improve the job-matching process, and help individuals combine family and work life in order to alleviate the pressures from aging on labor supply.