A new look at the discouragement and the added worker hypotheses: applying a trend–cycle decomposition to unemployment

Abstract

This article proposes an unobserved components approach to disentangle the influence of unemployment on labour participation into a permanent and a cyclical part, connected to discouragement and added worker effect, respectively. By splitting up the participation effect of changes in the unemployment rate, our analysis differs profoundly from previous studies that present the net of both or only a single effect. The results for Germany confirm that both the discouragement and the added worker effect exist, but different age groups respond differently to permanent and transitory changes in the unemployment rate.