Unemployment, Participation and Worker Flows over the Life Cycle

We estimate and report life cycle transition probabilities between employment, unemployment and inactivity for male workers using Current Population Survey monthly files. We assess the relative importance of each probability in explaining the life cycle profiles of participation and unemployment rates using a novel decomposition method. A key robust finding is that most differences in participation and unemployment over the life cycle can be attributed to the probability of leaving employment and the probability of transiting from inactivity to unemployment, while transitions from unemployment to employment (the job finding probability) play secondary roles. We then show that a simple life cycle extension of a three-state labor search model with leisure shocks can qualitatively replicate the empirical unemployment and participation life cycle profiles, without introducing age or worker heterogeneity in market abilities. We conclude that models that seek to explain life cycle work patterns should not ignore transitions to and from inactivity.