Endogenous labor market participation and the business cycle

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 2029

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Business Fluctuations; Cycles ; Labor Force and Employment, Size, and Structure ; Unemployment: Models, Duration, Incidence, and Job Search
• Subject: matching models ; labor market participation ; labor supply elasticity ; time aggregation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Haefke, Christian ; Reiter, Michael
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/33570
• Last update: 10.03.2025, 11:43 AM CET