Stochastic forecasting of labor force participation rates

Forecasts of labor force participation rates are important components of government projections of social insurance as well as projections of other aspects of a nation’s economy. However, the current practice is to provide only deterministic projections. In contrast, this paper shows how to model the uncertainty of labor participation and provide stochastic projections. ommodate a wide variety of applications, labor force participation rates are highly disaggregated; this paper considers rates separated by age, sex, marital status and the presence of young children in the family. Instead of using traditional multivariate time series models, this paper introduces hierarchical and longitudinal data models to forecast labor force participation rates. sting based on longitudinal data models gives desirable results. Not only are the forecasts comparable to those produced by government projections but we can also supplement these projections with prediction intervals. These prediction intervals help users understand the forecast uncertainty, thus more completely portraying the reliability of the projections.