A note on the labour market volatility puzzle: the role of endogenous participation

Lifang Xu

Applied Economics, 2025, vol. 57, issue 45, 7319-7331

Abstract: This article studies the effects of endogenous participation of marginally attached workers on wage dynamics and hence on the unemployment fluctuations in a stylized search theoretic model. It shows that endogenous participation of these workers induces a countercyclical component in the wage equation under Nash bargaining. As a result, the elasticity of wage with respect to productivity becomes smaller and hence the model can generate larger unemployment fluctuations, compared to the textbook model. With careful calibration, I show that the model well captures the wage dynamics and can explain the unemployment and job openings volatility reasonably well.

Date: 2025
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DOI: 10.1080/00036846.2024.2388310

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