Endogenous Labor Market Participation and the Business Cycle, IZA Discussion Paper; No. 2029

Haefke, Christian and Reiter, Michael (2006) Endogenous Labor Market Participation and the Business Cycle, IZA Discussion Paper; No. 2029. Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), Bonn, Institute for the Study of Labor, IZA Discussion Paper No. 2029. , 47 p.

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Abstract or Table of Contents

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. 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. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.

Item Type: Discussion/ Working Paper (Unspecified)
Keywords: Matching models, Labor market participation, Labor supply elasticity, Time aggregation
Classification Codes (e.g. JEL): E24, J21, J64
Research Groups: Macroeconomics and Public Finance
Status: Published
Date Deposited: 06 Oct 2016 09:20
Last Modified: 06 Oct 2016 09:20
URI: http://irihs.ihs.ac.at/id/eprint/4065

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