Do labor market flows affect labor-force participation?

This study examines if the flow rate from open unemployment to labor market programs affect the labor-force participation rate. This question is relevant because Swedish labor-force participation is expected to decline due to the age distribution in the population. A new dataset, with monthly data for Swedish municipalities between 1991:08 and 2002:10, has been constructed. The results show that increased probability of moving from open unemployment to labor market programs has positive effects on the labor-force participation rate. Positive effects are found for different age groups. The estimated effect of the flow rate from open unemployement into labor market programs is countercyclical. The participation rate is pro-cyclical, and counter-cyclical labor market programs could be used to prevent discouraged workers from leaving labor force. The effects of flow rates from programs to open unemployment, and from the job destruction rate are negative, as expected. Income and labor market tightness have positive effects, except for older participants. This is because it is a spurious negative correlation in data for the older participants. In general, the long run levels are achieved after about nine years, and most of the adjustment takes place during the first four years.