Equilibrium Unemployment in a Model of Imperfect Labour Market

Pietro Garibaldi and Etienne Wasmer

No 248, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper presents a simple model of imperfect labor markets with endogenous labor market participation and home production. We show that a two-sector economy (home and market) implies a three-state labor market when labor market imperfections take the form of an irreversible entry cost incurred by workers. This simple framework brings several results. First, it delivers an expression for the employment rate and as side-products, a measure of the unemployment rate and the size of the labour force. Second, it rationalizes several empirical works on the definition of unemployment in labor force surveys. Third, it derives endogenously all flows between three labour market states. Fourth, a calibration of the model rationalizes differences in employment rates: in the US., we find a market productivity premium of +30% and market frictions of -15% compared to France. Finally, the model is a very simple reduced form of search models with which it is fully consistent: the irreversible entry cost is the opportunity cost of search and depends on aggregate conditions.

Date: 2003
New Economics Papers: this item is included in nep-dge and nep-lab
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Related works:
Working Paper: Equilibrium EMployment in a Model of IMperfect Labour Market (2004)
Working Paper: Equilibrium Employment in a Model of Imperfect Labour Market (2003)
Working Paper: Equilibrium Employment in a Model of Imperfect Labour Market (2003)
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