provided by Research Papers in Economics
Structural Influences on Participation
Rates: A Canada-U.S. Comparison
Irene Ip, Sheryl King and Geneviève Verdier*
An understanding of what drives the partici-
pation rate is necessary for the projection
of labour force growth, a key input into the de-
termination of the economy’s production poten-
tial.1 The sharp drop in the participation rate in
Canada in the 1990s has given rise to consider-
able debate about its cause and if it was reason-
able to have expected it to have returned to its
pre-recession peak. If that peak is the appropri-
ate reference point, then the implications are
that labour market slack is considerably larger
than the present unemployment rate suggests.
While the severity of the 1990-91 recession in
Canada and the subsequent underachievement of
real GDP relative to potential caused much of the
decline and subsequent stagnation of the aggre-
gate participation rate, structural developments
and compositional shifts among various sub-
groups of the population of labour force age,
which were under way before 1989, also exerted
downward pressure. The purpose of this article is
to identify those supply side developments that
could have accounted for part of the decline in the
participation rate since 1989.2 Although this ap-
proach does not include an analysis of demand
side factors, cyclical effects are noted. The much
worse performance of the Canadian participation
rate than its U.S. counterpart in the 1990s, after
the similarities of the preceding 15 years, suggests
that using the U.S. labour market experience as a
benchmark for Canada may shed some light on
the situation, especially since the United States
has been operating at full capacity for some time.
Econometric estimation of participation rates is
hampered by the presence of many influences
that are difficult to measure, such as changes in
the availability of private and public pension
plans, family relationships and structures, and the
costs of and subsidies to education.3 If these influ-
ences cannot be specifically modelled, projec-
tions based on such estimations will be unreli-
able. Fortin and Fortin (1999) estimated the
Chart 1 Participation rates and employment rates,
Canada and the United States
™ Participation rate Canada = Participation rate United States
™ Employment rate Canada = Employment rate United States
aggregate participation rate, using a quadratic
time trend to capture the effects of such influ-
ences, but they noted the problems of this tech-
nique in “appraising future non-policy structural
developments in labour force participation.”
Thus, predictions based on econometric estima-
tion must often be supplemented by judgment. In
this paper, judgment about the effect of the vari-
ous supply side factors on the participation rates
of the major sub-groups, leads to projections of
these rates, given a moderately expanding econ-
omy.
From the mid-1970s to the end of the 1980s, the
behaviour in the aggregate participation rates of
both Canada and the United States were broadly
similar (Chart 1), rising to record highs by the end
of the 1980s with only one significant interruption
in the early 1980s.4 The dominant influence on
the aggregate participation rates of both countries
was the strong upward trend in women’s partici-
pation rates that had begun in the 1950s (Chart 2).
Summer 1999
Canadian Business Economics