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Equilibrium Employment in a Model of Imperfect Labor Markets

Author

Listed:
  • Garibaldi, Pietro

    (Collegio Carlo Alberto)

  • Wasmer, Etienne

    (Sciences Po, Paris)

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 labor force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labor market states. Fourth, a calibration of the model rationalizes differences in employment rates: in the U.S., 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

  • Garibaldi, Pietro & Wasmer, Etienne, 2003. "Equilibrium Employment in a Model of Imperfect Labor Markets," IZA Discussion Papers 950, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp950
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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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    More about this item

    Keywords

    non-employment; labor market participation; employment; frictions;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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