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Search frictions and labor market participation

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  • Pries, Michael
  • Rogerson, Richard

Abstract

Cross-country differences in labor market participation are often larger than differences in unemployment rates. The same holds true across demographic groups within a given economy. We argue that the interaction between labor force participation decisions and labor market frictions can help us understand these patterns. This interaction highlights dynamic aspects of the participation decision, in contrast to standard textbook treatments that emphasize static costs and benefits of participation. We extend the standard labor market search problem to allow for a third state--non-participation--and assumes that stochastic participation costs precipitate flows into and out of non-participation. We fully characterize the worker's decision problem and use numerical simulations to demonstrate how participation patterns vary with individual characteristics and with labor market conditions.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 5 (July)
Pages: 568-587

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:5:p:568-587

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Labor market search Labor market participation;

References

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  1. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," Sciences Po publications info:hdl:2441/8921, Sciences Po.
  2. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 187-207, March.
  3. Bowlus, Audra J, 1997. "A Search Interpretation of Male-Female Wage Differentials," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(4), pages 625-57, October.
  4. Poterba, James M & Summers, Lawrence H, 1986. "Reporting Errors and Labor Market Dynamics," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1319-38, November.
  5. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, Elsevier, vol. 7(2), pages 188-209, February.
  6. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series in Economics and Finance 178, Stockholm School of Economics.
  7. Burdett, Kenneth, et al, 1984. "Earnings, Unemployment, and the Allocation of Time over Time," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(4), pages 559-78, October.
  8. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 254-83, June.
  9. Michael Pries & Richard Rogerson, 2005. "Hiring Policies, Labor Market Institutions, and Labor Market Flows," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(4), pages 811-839, August.
  10. Christopher J. Flinn, 2002. "Labour Market Structure and Inequality: A Comparison of Italy and the U.S," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 611-645.
  11. Fernando Alvarez & Marcelo Veracierto, 2000. "Labor-Market Policies in an Equilibrium Search Model," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 265-316 National Bureau of Economic Research, Inc.
  12. Andolfatto, D. & Gomme, P. & Storer, P., 1996. "U.S. Labour Market Policy and the Canada-U.S. Unemployment Rate Gap," Working Papers 9604, University of Waterloo, Department of Economics.
  13. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  14. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 147-162, January.
  15. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 44(1), pages 47-82, June.
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