 Uncertainty and Labour Force ParticipationPost-Print from HAL Abstract: Can an increase in uncertainty generate a fall in labour force participation? This paper supports an affirmative answer to this question. Using a structural vector autoregressive model, I show that: (i) a surge in uncertainty leads to a decrease in participation; (ii) uncertainty shocks account for a considerable proportion of participation fluctuations; and (iii) uncertainty shocks have in recent years contributed non‐marginally to participation variations. To explain these facts, I build a New Keynesian dynamic stochastic general equilibrium model with a frictional labour market, endogenous labour force and stochastic volatility. A model with flexible prices induces the expansionary effects of uncertainty on labour force participation. By contrast, a model with price stickiness can reproduce negative empirical comovements. As firms postpone hiring, the household follows a discouragement effect and responds by reducing the size of the labour force. This paper suggests that in a context of variable labour supply, labour market frictions alone do not suffice to reproduce the negative effects of uncertainty shocks. It also confirms the importance of rigid prices as an amplification mechanism for uncertainty shocks and suggests that the modelling of labour force participation has some implications on the transmission channel of uncertainty. Keywords: Econometrics; analysis (search for similar items in EconPapers) Published in Oxford Bulletin of Economics and Statistics, 2020, ⟨10.1111/obes.12392⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03119706 DOI: 10.1111/obes.12392 Access Statistics for this paper More papers in Post-Print from HAL |
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