Is Labor Supply Important for Business Cycles?

Per Krusell, Toshihiko Mukoyama, Richard Rogerson and Aysegul Sahin

No 17779, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We build a general equilibrium model that features uninsurable idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. The model is calibrated to match the average levels of gross flows across the three labor market states: employment, unemployment, and non-participation. We use it to study the implications of two kinds of aggregate shocks for the cyclical behavior of labor market aggregates and flows: shocks to search frictions (the rates of job finding and job loss) and shocks to the return on the market activity (any factors affecting aggregate productivity). We find that both kinds of shocks are needed to explain the labor market data, and that an active labor supply channel is key. A model with friction shocks only, calibrated to match unemployment fluctuations, accounts for only a small fraction of employment fluctuations and has counterfactual cyclical predictions for participation.

JEL-codes: E24 J22 J64 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-bec, nep-dge, nep-lab and nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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