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Equilibrium EMployment in a Model of IMperfect Labour Market

  • Etienne Wasmer
  • Pietro Garibaldi

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

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 344.

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Date of creation: 2004
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Handle: RePEc:red:sed004:344
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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. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  3. Becker, Gary S, 1988. "Family Economics and Macro Behavior," American Economic Review, American Economic Association, vol. 78(1), pages 1-13, March.
  4. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," Sciences Po publications info:hdl:2441/8921, Sciences Po.
  5. Becker, Gary S & Murphy, Kevin M, 1988. "The Family and the State," Journal of Law and Economics, University of Chicago Press, vol. 31(1), pages 1-18, April.
  6. Michael Sattinger, 2003. "A Search Version of the Roy Model," Discussion Papers 03-08, University at Albany, SUNY, Department of Economics.
  7. 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.
  8. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  9. Phelps, Edmund S, 1995. "The Structuralist Theory of Employment," American Economic Review, American Economic Association, vol. 85(2), pages 226-31, May.
  10. 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.
  11. Stephen R. G. Jones & W. Craig Riddell, . "The Measurement Of Unemployment: An Empirical Approach," Canadian International Labour Network Working Papers 09, McMaster University.
  12. 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.
  13. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
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