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Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows

Author

Listed:
  • Pietro Garibaldi

    (Collegio Carlo Alberto)

  • Etienne Wasmer

Abstract

The sustainability of Welfare States requires high employment/high participation to raise the tax base and avoid distortions. To analyse labour market participation decisions in a world with market frictions, we propose and solve a three-state macro model of the labour market. We show that workers' decisions of entering into the labour market and exiting from the labour market are fundamentally different in the presence of frictions: irreversible costs paid by workers at the entry level imply that labour supply is determined by two margins, the entry and the exit margins. On the normative point of view, we show that the existence of two margins alters significantly the conventional effects of payroll taxes and unemployment benefits. On the positive point of view, our model rationalizes the existence of most labour market flows and of 'marginally attached workers'. Furthermore, a calibration improves the usual representations of labour markets.

Suggested Citation

  • Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," Sciences Po publications info:hdl:2441/8921, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/8921
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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