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On the importance of the participation margin for market fluctuations

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  • Michael W.L. Elsby
  • Bart Hobijn
  • Aysegül Sahin

Abstract

Conventional analyses of cyclical fluctuations in the labor market ascribe a minor role to the labor force participation margin. In contrast, a flows-based decomposition of the variation in labor market stocks reveals that transitions at the participation margin account for around one-third of the cyclical variation in the unemployment rate. This result is robust to adjustments of data for spurious transitions, and for time aggregation. Inferences from conventional, stocks-based analyses of labor force participation are shown to be subject to a stock-flow fallacy, neglecting the offsetting forces of worker flows that underlie the modest cyclicality of the participation rate. A novel analysis of history dependence in worker flows demonstrates that a large part of the contribution of the participation margin can be traced to cyclical fluctuations in the composition of the unemployed by labor market attachment.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-05.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-05

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Keywords: Labor market ; Unemployment;

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References

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  1. Smith, Jennifer, 2010. "The Ins and Outs of UK Unemployment," The Warwick Economics Research Paper Series (TWERPS) 944, University of Warwick, Department of Economics.
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Cited by:
  1. Davig, Troy A. & Mustre-del-Rio, Jose, 2013. "The shadow labor supply and its implications for the unemployment rate," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-29.

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