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Explaining the Joint Behavior of Employment, Unemployment and Nonparticipation

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  • Moon, Weh-Sol

Abstract

This paper argues that existing matching models with unemployment as an active search and nonparticipation as an inactive search predict counterfactual results: the unemployment rate is at most two times as volatile as the employmentpopulation ratio; only 20 percent of the actual volatility of the unemployment rate is accounted for; and the labor market variables are perfectly correlated with each other. This paper proposes a modified matching model in which workers are classified after matches take place. The modified model generates the direct transition from nonparticipation to employment with no assumption that nonparticipation is an inactive search and without adjusting the time period of the model. The model also explains the important cyclical features of the U.S. labor market.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10583.

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Date of creation: Feb 2008
Date of revision: May 2008
Handle: RePEc:pra:mprapa:10583

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Keywords: Search and Matching; Business Cycles; Unemployment; Labor Force Participation;

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  1. Tripier, Fabien, 2004. "Can the labor market search model explain the fluctuations of allocations of time?," Economic Modelling, Elsevier, Elsevier, vol. 21(1), pages 131-146, January.
  2. Harold L. Cole & Richard Rogerson, 1996. "Can the Mortonson-Pissarides matching model match the business cycle facts?," Staff Report, Federal Reserve Bank of Minneapolis 224, Federal Reserve Bank of Minneapolis.
  3. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2409, C.E.P.R. Discussion Papers.
  4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  5. Haefke, Christian & Reiter, Michael, 2006. "Endogenous Labor Market Participation and the Business Cycle," IZA Discussion Papers 2029, Institute for the Study of Labor (IZA).
  6. Pries, Michael & Rogerson, Richard, 2009. "Search frictions and labor market participation," European Economic Review, Elsevier, Elsevier, vol. 53(5), pages 568-587, July.
  7. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 50-65, March.
  8. Veracierto, Marcelo, 2008. "On the cyclical behavior of employment, unemployment and labor force participation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(6), pages 1143-1157, September.
  9. Garibaldi, Pietro & Wasmer, Etienne, 2003. "Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3986, C.E.P.R. Discussion Papers.
  10. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, Elsevier, vol. 7(2), pages 188-209, February.
  11. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  12. Katharine G. Abraham & Robert Shimer, 2001. "Changes in Unemployment Duration and Labor Force Attachment," NBER Working Papers 8513, National Bureau of Economic Research, Inc.
  13. 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.
  14. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
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