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Endogenous Labor Market Participation and the Business Cycle

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  • Haefke, Christian

    ()
    (New York University, Abu Dhabi)

  • Reiter, Michael

    ()
    (IHS - Institute for Advanced Studies, Vienna)

Abstract

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2029.

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Length: 50 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2029

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Keywords: matching models; labor market participation; labor supply elasticity; time aggregation;

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  1. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-74, September.
  2. John Kennan, 2006. "Private Information, Wage Bargaining and Employment Fluctuations," NBER Working Papers 11967, National Bureau of Economic Research, Inc.
  3. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 867-896, October.
  4. Marcelo Veracierto, 2002. "On the cyclical behavior of employment, unemployment and labor force participation," Working Paper Series, Federal Reserve Bank of Chicago WP-02-12, Federal Reserve Bank of Chicago.
  5. L. Rachel Ngai & Christopher A. Pissarides, 2006. "Trends in Hours and Economic Growth," CEP Discussion Papers dp0746, Centre for Economic Performance, LSE.
  6. Richard Blundell & André Chiappori & Thierry Magnac & Costas Meghir, 1998. "Collective labour supply: heterogeneity and non-participation," IFS Working Papers, Institute for Fiscal Studies W98/20, Institute for Fiscal Studies.
  7. Tripier, Fabien, 2004. "Can the labor market search model explain the fluctuations of allocations of time?," Economic Modelling, Elsevier, vol. 21(1), pages 131-146, January.
  8. Dale T. Mortensen, 2005. "More on Unemployment and Vacancy Fluctuations," 2005 Meeting Papers 326, Society for Economic Dynamics.
  9. 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.
  10. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
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