Business cycle characteristics of the Australian labour market with an endogenous participation rate

We use a SVAR model to analyse gross flows of workers between the states of employment, unemployment and non-participation in the Australian labour market. We determine the cyclicality of stocks, gross flows and state transition rates by examining their responses to business cycle shocks. We use the derived cyclicality of transition rates to characterise labour force inflows and outflows as being consistent in aggregate with either the Discouraged-Worker Effect or the Added-Worker Effect. We find evidence that the total participation rate is procyclical which means that the Discouraged-Worker Effect is dominant overall, but also find that the Added-Worker Effect is dominant in several particular types of transition. We also apply shocks to gross flows between employment and unemployment and find that unemployment inflows are more important than outflows to the evolution of the unemployment rate. We find that participation decisions make only a small contribution to unemployment relative to flows between employment and unemployment.