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Added workers and the business cycle

Listed author(s):
  • Elisa Faraglia

Every month thousands of people become employed or unemployed. In the same month thousands of people decide to enter or exit the labor force. Although most of the literature focuses primarily on job flows, several recent empirical and theoretical studies suggest that, in order to completely understand the labor market dynamics, it is important also to focus on the worker flows. Furthermore, macroeconomic models generally abstract from the presence of the out-of-the-labor-force pool; yet, the data suggest that this pool produces and receives large flows that significantly affect the performance of the labor market. Transitions from and to the out-of-the-labor-force pool are mainly composed by what are sometimes referred to as “discouraged workers†and “added workers†. I analyze the behavior of the “discouraged workers†in “Endogenous Search Intensity, Gross Worker Flows and the Business Cycle†. I show that the mechanism that rules their behavior is given by the fact that in bad times employment possibilities deteriorate, making alternative activities, such as home production, more attractive. Hence in recessions agents are keener to leave the labor force. However, there is also a procyclical flow of agents from employment to out-of-the-labor-force and a countercyclical flow from out-of-the-labor-force to unemployment. These flows are composed by “added workers†. They are the focus of the present paper. At first it may seem puzzling that in expansions, times when labor market prospects look promising, agents would choose to leave employment to become “inactive†. Who would do such a thing and why? By analyzing U.S. data, I show that the flows from employment to out-of-the-labor-force and from out-of-the-labor-force to unemployment are mostly composed by married women. This suggests that important income or complementarity effects are what determine the composition and the cyclical behavior of these flows. For example, in a household, the member that is less attached to the labor force will actively participate in the labor market when the head of the household earns less or has a higher probability of becoming unemployed. I develop a search and matching model in the style of Mortensen and Pissarides (1994) where the participation decision of women is influenced by the employment status and earnings level of their husbands. After men have decided their employment status, women choose whether to search for a job, be employed or stay out-of-the-labor-force. Men are attached to the labor force, and they enjoy utility only from their own income. In every period, they transfer a fraction of their earnings to their wives, who in turn choose whether to participate in the labor market. Women obtain utility from two complementary goods, a market and a home produced good. The market good is financed by their total income, whereas the home good is produced during the fraction of time that they and their husbands spend neither searching nor working. I calibrate and simulate the model in order to verify whether the hypothesis on the structure of the preferences and the composition of the population can explain the cyclical behavior of “added workers†. The results show that the probability for an employed woman to exit the labor force is procyclical and the probability she starts to search for a job when out-of-the-labor-force is countercyclical, just as in the data.

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 262.

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Date of creation: 2004
Handle: RePEc:red:sed004:262
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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