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Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows

Author

Listed:
  • Pietro Garibaldi

    (Bocconi University)

  • Etienne Wasmer

    (UQAM)

Abstract

The sustainability of welfare states requires high employment and high participation to raise the tax base. To analyze labor supply in a world with market frictions, we propose and solve a macro model of the labor market with unemployment and labor force participation as endogenous and distinct states. In our world, workers' decisions of participating are determined by an entry decision and an exit decision. A calibration of the model improves the usual representations of labor markets, since it quantitatively accounts for the observed flows between employment and nonparticipation. The paper investigates also the effect of payroll taxes and unemployment benefits on participation decisions. Taxes reduce entries and increase exits, whereas unemployment benefits, at a given job-finding rate, raise entries and have ambiguous effects on exits. (JEL: J2, J6) Copyright (c) 2005 by the European Economic Association.

Suggested Citation

  • Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 851-882, June.
  • Handle: RePEc:tpr:jeurec:v:3:y:2005:i:4:p:851-882
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    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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