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I have read several Labor Economics books, but I am stuck. Is the labor force participation rate related more to the labour supply or to the labour demand?

If the labor force participation rate decreases in a year (with respect to the previous year), should we worry that employers are not hiring (i.e., labor demand)? Or, is it due to workers that are not currently interested in work (i.e., homemakers)?

Furthermore, from this and this online documents it seems that the LFPR (labor force participation rate) is strongly dependent on labor demand from employers (i.e., positive/negative business cycles) rather than from labor supply. For instance, the LFPR dropped strongly during the Great Recession as employers were not willing to hire workers. Any opinion on these problems?

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It's both but if one is "more correct" then it would be labor supply. In an economics sense, just to be clear here, during the Great Recession the labor force PR didn't contract because of "employers were not willing to hire workers" per se. The labor force includes those currently employed and those not working but are actively looking for work. So it's as unemployed workers become discouraged and stop trying to look for work that the labor force contracted. Then on the demand side consider someone receiving a form of govt benefits (food stamps, cash asst., unemployment benefits) for instance. If they receive 400USD wk and have the opportunity to work 20hr/wk at 8USD (so 160USD/wk) and are subject to a benefit reduction rate of 100%---meaning that for every 1USD they earn, they lose 1USD in benefits---they aren't likely to take that job as they are basically working for nothing for the first 400USD.

I would recommend checking out Ehrenberg's "Modern Labor Economics", chapter titled Labor Supply (it's chap 7 in my edition).

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This is/was a huge topic in macro and labor. Traditionally, macroeconomists calibrate models that require huge labor supply elasticities to match the data. Then labor economists estimate labor supply elasticities from micro data and find very very low elasticities.

Imo the labor estimates are more trustworthy than the macro calibrations. Check out http://www.rajchetty.com/chettyfiles/micro_macro_aerpp.pdf for a summary of the issue and citations to the further literature.

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  • $\begingroup$ Good pointer to the macro vs micro labor supply elasticities. But the question is supply vs demand elasticities. $\endgroup$ – Paul Jun 24 '17 at 20:49
  • $\begingroup$ for given given changes in other variables, the two have to sum to the observed change in employment. $\endgroup$ – Tobias Jun 24 '17 at 21:12
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Traditionally, labor force participation is best thought of as a supply-side phenomena. That is, a certain subset of our nation's population is jobless but is jobless by choice. For example, consider a stay-at-home parent. So, we have agents making a decision to not supply labor.

However, there is a hint of the demand side at play here. For example, a very weak demand side might discourage workers, thereby compelling the marginal participant to exit the labor force.

So, to be explicit: LFP is a supply-side concept. However, there is a mechanism through which demand side forces can factor into LFP.

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