Forecasting economic activity rates

This paper develops a new set of models for projecting labour market activity rates for the UK economy. The Department of Employment currently publishes annual projections with a 10-15 year time horizon. The present research was aimed at improving the methodology used for these forecasts. The models developed attempt to reflect, as fully as possible, the behavioural relationships which are involved in the decision to actively participate in the workforce. As such, they draw on current theoretical contributions to the literature on labour supply. Additionally, account is taken of recent advances in the economic analysis of time series to obtain forecasting equations, which are derived from a set of co-integrated equilibrium relationships. The newly derived equations are applied to forecast activity rates, for a number of male and female age cohorts, over the period 1990-2000. Continuation of trend or an assumption of no change are used for establishing future values of the key determining variables. The results are compared against existing models which rely heavily on trend and dummy variables. The new models developed here are found to produce projections which, whilst broadly comparable to these generated from the existing equations, nevertheless show some important differences