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The Cyclicality of Labor Force Participation Flows: The Role of Labor

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  • Isabel Cairo

    (Board of Governors)

  • Shigeru Fujita

    (Federal Reserve Bank of Philadelphia)

  • Camilo Morales-Jimenez

    (Board of Governors)

Abstract

Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the cyclical behavior of transition rates implies that the participation margin is strongly countercyclical: the household's incentive to send the workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) procyclical values of non-market activities and (ii) wage rigidity. The smaller the value of the extensive-margin labor supply elasticity is, the stronger the first channel is. Wage rigidity helps because it mitigates increases in the return to market work during expansions. Our estimated model replicates well the behavior of transition rates between the three labor market states and thus the stocks, once both features are in place. (Copyright: Elsevier)

Suggested Citation

  • Isabel Cairo & Shigeru Fujita & Camilo Morales-Jimenez, 2022. "The Cyclicality of Labor Force Participation Flows: The Role of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 197-216, January.
    • Handle: RePEc:red:issued:20-507
    DOI: 10.1016/j.red.2021.02.001
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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