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Endogenous Labor Market Participation and the Business Cycle

  • Christian Haefke

    (IAE-CSIC)

  • Michael Reiter

    (Universitat Pompeu Fabra)

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates, and suffer from the usual defects of matching models. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. Furthermore, the low labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US. The key improvements over previous attempts are the right degree of heterogeneity in home productivity and a careful treatment of time aggregation

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 383.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:383
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  1. Blundell, Richard & Chiappori, Pierre-André & Magnac, Thierry & Meghir, Costas, 2005. "Collective Labour Supply: Heterogeneity and Nonparticipation," IDEI Working Papers 373, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Rachel Ngai & Christopher Pissarides, 2006. "Trends in Hours and Economic Growth," 2006 Meeting Papers 56, Society for Economic Dynamics.
  3. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  4. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  5. John Kennan, 2005. "Private Information, Wage Bargaining and Employment Fluctuations," 2005 Meeting Papers 555, Society for Economic Dynamics.
  6. Tripier, Fabien, 2004. "Can the labor market search model explain the fluctuations of allocations of time?," Economic Modelling, Elsevier, vol. 21(1), pages 131-146, January.
  7. Marcelo Veracierto, 2002. "On the cyclical behavior of employment, unemployment and labor force participation," Working Paper Series WP-02-12, Federal Reserve Bank of Chicago.
  8. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-74, September.
  9. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
  10. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
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