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Equilibrium Unemployment in a Model of Imperfect Labour Market

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  • Pietro Garibaldi
  • Etienne Wasmer

Abstract

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.

Suggested Citation

  • Pietro Garibaldi & Etienne Wasmer, 2003. "Equilibrium Unemployment in a Model of Imperfect Labour Market," Working Papers 248, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:248
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    References listed on IDEAS

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    1. Edward C. Prescott, 2002. "Prosperity and Depression: 2002 Richard T. Ely Lecture," Working Papers 618, Federal Reserve Bank of Minneapolis.
    2. 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.
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    7. 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.
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    Cited by:

    1. Samir Amine & Pedro Lages Dos Santos, 2015. "Negative Income Tax and Labor Market Participation: A Short Run Analysis," CIRANO Working Papers 2015s-28, CIRANO.

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    JEL classification:

    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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