Labour force participation in Sweden and the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

We have published a number of models for the rate of participation in labour force, LFP. The intuition behind the model is very simple. The growth in real GDP influences the labour force supply through redistribution of personal incomes. Fluctuations in real GDP per capita relative to that defined by inertial economic growth, A1/G, provide variations in the distribution of personal income relative to some inertial (or neutral) growth rate. The influence of the growth in real GDP on the LFP has to be complicated by the presence of exponential distribution of personal inputs to real GDP. If the effect of real growth is based on the excess of the total personal income above its potential (inertia) level, then higher levels of LFP are more sensitive to real growth. Really, more people can be included in or excluded from the redistribution because of their smaller personal incomes for paid jobs, which are replaced by some other (not measured) mechanisms of personal income earning. It is reasonable to assume that the sensitivity of LFP to the difference between actual and potential (inertial) growth rates, e(t)=dG/GA/G, grows exponentially with increasing LFP. In addition, there might be a time delay between action and reaction and the LFP may lag behind the e(t). Now we are ready for a quantitative analysis with a tentative relationship: 

{B1dLFP(t)/LFP(t) + C1}exp{ a1[LFP(t) - LFP(t0)]/LFP(t0) =

          = {dG(t-T))/G(t-T) – A/G(t-T)}dt

Here we present the model of labour force participation in Sweden. Figure 1 shows that the LFP is very well predicted since 1975. This model is valid for all developed countries. No macroeconomic model can predict the observed changes in LFP using only one macroeconomic parameter. Since the presented model describes the case of Sweden I also mean the latter laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel awarded “for their analysis of markets with search frictions” have failed to model the labour market and predict its evolution at the same level of accuracy and forecast horizon.

Why we need the sophisticated model not describing reality if there exists a simple model predicting as accurately as one can only dream?

Figure 1. Observed and predicted LFP in Sweden: T=0.

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