The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity

Isabel Cairo, Shigeru Fujita and Camilo Morales-Jimenez

No 20-23, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the behavior of transition rates implies that the participation margin is strongly countercyclical: the household’s incentive to send more workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) the procyclical values of non-market activities and (ii) wage rigidity. The smaller the value of the extensive-margin labor supply elasticity is, the stronger the first channel is. Wage rigidity helps because it mitigates increases in the return to market work during expansions. Our estimated model replicates remarkably well the behavior of transition rates between the three labor market states and thus the stocks, once these two features are in place.

Keywords: Labor force participation; unemployment; labor supply elasticity (search for similar items in EconPapers)
JEL-codes: E24 J64 (search for similar items in EconPapers)
Pages: 56
Date: 2020-06-04
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.21799/frbp.wp.2020.23

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