Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows

Pietro Garibaldi () and Etienne Wasmer ()

No 3986, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: labour supply; search frictions; welfare state (search for similar items in EconPapers)
JEL-codes: J20 J30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2003-07
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Journal Article: Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows (2005)
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