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Labor Market Flows and Equilibrium Search Unemployment

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Author Info
Garibaldi, Pietro (Bocconi University and CEPR)
Wasmer, Etienne () (ECARES, ULB, Université de Metz, CEPR and IZA, Bonn)

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Abstract

This paper explicitly differentiates between unemployment and inactivity, by defining inactivity as a state in which individuals do not search for jobs when non-employed. Facing changes in the value of inactivity, individuals transit through three labor market states. In steady-state, we hence have a theory of equilibrium unemployment determined by both matching frictions and labor market participation margins. The paper firstly rationalizes and quantitatively accounts for the existence of large flows between employment, unemployment and inactivity. Secondly, it shows that unemployment and aggregate wages rise because some of the employed workers are unattached to the labor force, in the sense that they join the inactive pool when they lose a job. Thirdly, unemployment income has little effects on employment, since it attracts people into the labor force and rises the share of attached workers. Finally, our theory suggests that contrary to two-state models, taxation of market activity increases non-participation, unattachment and adversely affects unemployment.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 406.

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Length: 41 pages
Date of creation: Nov 2001
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Handle: RePEc:iza:izadps:dp406

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Related research
Keywords: Unemployment matching home production

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Find related papers by JEL classification:
J2 - Labor and Demographic Economics - - Demand and Supply of Labor
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December. [Downloadable!] (restricted)
    Other versions:
  2. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
    Other versions:
  3. Burda, Michael & Wyplosz, Charles, 1994. "Gross worker and job flows in Europe," European Economic Review, Elsevier, vol. 38(6), pages 1287-1315, June. [Downloadable!] (restricted)
    Other versions:
  4. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 47-104, 04. [Downloadable!] (restricted)
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  5. D Mortensen & C Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers 0421, Centre for Economic Performance, LSE.
    Other versions:
  6. Kenneth Burdett & Dale T. Mortensen, 1977. "Labor Supply Under Uncertainty," Discussion Papers 297, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1992. "Why Has the Natural Rate of Unemployment Increased over Time?," NBER Reprints 1694, National Bureau of Economic Research, Inc.
    Other versions:
  8. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January. [Downloadable!] (restricted)
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  9. McKenna, Christopher J, 1987. "Labour Market Participation in Matching Equilibrium," Economica, London School of Economics and Political Science, vol. 54(215), pages 325-33, August. [Downloadable!] (restricted)
  10. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
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  12. Sattinger, Michael, 1995. "General Equilibrium Effects of Unemployment Compensation with Labor Force Participation," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 623-52, October. [Downloadable!] (restricted)
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  13. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December. [Downloadable!] (restricted)
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  15. Seater, John J., 1977. "A unified model of consumption, labor supply, and job search," Journal of Economic Theory, Elsevier, vol. 14(2), pages 349-372, April. [Downloadable!] (restricted)
  16. Swaim, Paul & Podgursky, Michael, 1994. "Female Labor Supply Following Displacement: A Split-Population Model of Labor Force Participation and Job Search," Journal of Labor Economics, University of Chicago Press, vol. 12(4), pages 640-56, October. [Downloadable!] (restricted)
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    Other versions:
  20. Olivier Jean Blanchard & Peter Diamond, 1991. "The Cyclical Behavior of the Gross Flows of U.S. Workers," NBER Reprints 1582, National Bureau of Economic Research, Inc.
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  21. Eisner, Robert, 1988. "Extended Accounts for National Income and Product," Journal of Economic Literature, American Economic Association, vol. 26(4), pages 1611-84, December. [Downloadable!] (restricted)
  22. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bertil Holmlund, 2004. "Sickness Absence and Search Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  2. Garibaldi, Pietro & Wasmer, Etienne, 2003. "Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows," CEPR Discussion Papers 3986, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Mário Centeno & Márcio Corrêa, 2006. "Job Matching, Unexpected Obligations And Retirement Decisions," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 159, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  4. Elisabetta Marzano, 2004. "Dual Labour Market Theories And Irregular Jobs: Is There a Dualism Even in The Irregular Sector?," CELPE Discussion Papers 81, CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy. [Downloadable!]
  5. M. Scarlato & M. Cenci, 2004. "Innovazione tecnologica e offerta di skills:una simulazione," Computational Economics 0401003, EconWPA. [Downloadable!]
  6. Étienne Wasmer, 2006. "Links between Labor Supply and Unemployment: Theory and Empirics," Cahiers de recherche 0615, CIRPEE. [Downloadable!]
  7. Olivier L'Haridon & Franck Malherbet, 2006. "Employment Protection Reform in Search Economies," IZA Discussion Papers 2304, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Burgess, Simon & Turon, Hélène, 2003. "Unemployment Equilibrium and On-the-Job Search," IZA Discussion Papers 753, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  9. Bunzel, H. & Bhattacharya, J, 2003. "Chaotic planning solutions in the textbook model of labor market search and matching," Discussion Paper 15, Tilburg University, Center for Economic Research. [Downloadable!]
  10. Bryan Engelhardt & Guillaume Rocheteau & Peter Rupert, 2007. "Crime and the labor market: a search model with optimal contracts," Working Paper 0715, Federal Reserve Bank of Cleveland. [Downloadable!]
  11. Olivier, PIERARD, 2004. "Impact of Selective Reductions in Labor Taxation," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2004035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  12. Bhattacharya, Joydeep & Bunzel, Helle, 2003. "Dynamics of the planning solution in the discrete−time textbook model of labor market search and matching," Staff General Research Papers 10253, Iowa State University, Department of Economics.
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