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Equilibrium Unemployment in a Model of Imperfect Labour Market

  • Pietro Garibaldi
  • Etienne Wasmer

This paper presents a simple model of imperfect labor markets with endogenous labor market participation and home production. We show that a two-sector economy (home and market) implies a three-state labor market when labor market imperfections take the form of an irreversible entry cost incurred by workers. This simple framework brings several results. First, it delivers an expression for the employment rate and as side-products, a measure of the unemployment rate and the size of the labour force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labour market states. Fourth, a calibration of the model rationalizes differences in employment rates: in the US., we find a market productivity premium of +30% and market frictions of -15% compared to France. Finally, the model is a very simple reduced form of search models with which it is fully consistent: the irreversible entry cost is the opportunity cost of search and depends on aggregate conditions.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 248.

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Date of creation: 2003
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Handle: RePEc:igi:igierp:248
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  1. Gary S. Becker & Kevin M. Murphy, . "The Family and the State," University of Chicago - Population Research Center 87-15, Chicago - Population Research Center.
  2. Michael Sattinger, 2003. "A Search Version of the Roy Model," Discussion Papers 03-08, University at Albany, SUNY, Department of Economics.
  3. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
  4. Phelps, Edmund S, 1995. "The Structuralist Theory of Employment," American Economic Review, American Economic Association, vol. 85(2), pages 226-31, May.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  6. Mortensen, Dale T., 1994. "The cyclical behavior of job and worker flows," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1121-1142, November.
  7. Bulow, Jeremy I & Summers, Lawrence H, 1986. "A Theory of Dual Labor Markets with Application to Industrial Policy,Discrimination, and Keynesian Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 376-414, July.
  8. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," Sciences Po publications info:hdl:2441/8921, Sciences Po.
  9. Becker, Gary S, 1988. "Family Economics and Macro Behavior," American Economic Review, American Economic Association, vol. 78(1), pages 1-13, March.
  10. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, vol. 67(1), pages 147-162, January.
  11. Edward C. Prescott, 2002. "Prosperity and Depression: 2002 Richard T. Ely Lecture," Working Papers 618, Federal Reserve Bank of Minneapolis.
  12. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  13. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
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