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Endogenous Labor Market Participation and the Business Cycle

Michael Reiter () and Christian Haefke ()

No 202, Working Papers from Barcelona Graduate School of Economics

Abstract: 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 crosssectional 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.

Keywords: Matching Models; Labor Market Participation; Labor Supply Elasticity; Time Aggregation (search for similar items in EconPapers)
JEL-codes: E24 E32 J21 J64 (search for similar items in EconPapers)
Date: 2006-03
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Working Paper: Endogenous Labor Market Participation and the Business Cycle (2006) Downloads
Working Paper: Endogenous Labor Market Participation and the Business Cycle (2006)
Working Paper: Endogenous labor market participation and the business cycle (2006) Downloads
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