Elasticities of Labor Supply and Labor Force Participation Flows

Isabel Cairo, Camilo Morales-Jimenez and Shigeru Fujita
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Camilo Morales-Jimenez: Federal Reserve Board

No 1100, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Using a representative-household search and matching model with endogenous labor force participation, we study the interactions between extensive-margin labor supply elasticities and the cyclicality of labor force participation flows. Our model successfully replicates salient business-cycle features of all transition rates between three labor market states, the unemployment rate, and the labor force participation rate, while using values of elasticities consistent with micro evidence. Our results underscore the importance of the procyclical opportunity cost of employment, together with wage rigidity, in understanding the cyclicality of labor market flows and stocks.

Date: 2019
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