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On the importance of the participation margin for market fluctuations

  • Michael W.L. Elsby
  • Bart Hobijn
  • Aysegül Sahin

Conventional analyses of cyclical fluctuations in the labor market ascribe a minor role to the labor force participation margin. In contrast, a flows-based decomposition of the variation in labor market stocks reveals that transitions at the participation margin account for around one-third of the cyclical variation in the unemployment rate. This result is robust to adjustments of data for spurious transitions, and for time aggregation. Inferences from conventional, stocks-based analyses of labor force participation are shown to be subject to a stock-flow fallacy, neglecting the offsetting forces of worker flows that underlie the modest cyclicality of the participation rate. A novel analysis of history dependence in worker flows demonstrates that a large part of the contribution of the participation margin can be traced to cyclical fluctuations in the composition of the unemployed by labor market attachment.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-05.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-05
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