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Endogenous Labor Market Participation and the Business Cycle

Christian Haefke () and Michael Reiter ()

No 383, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates, and suffer from the usual defects of matching models. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. Furthermore, the low labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US. The key improvements over previous attempts are the right degree of heterogeneity in home productivity and a careful treatment of time aggregation

Keywords: Matching Models; Labor Supply Elasticity; Time Aggregation; Fluctuations (search for similar items in EconPapers)
JEL-codes: E24 E32 J21 (search for similar items in EconPapers)
Date: 2006-07-04
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Working Paper: Endogenous Labor Market Participation and the Business Cycle (2006) Downloads
Working Paper: Endogenous Labor Market Participation and the Business Cycle (2006) Downloads
Working Paper: Endogenous labor market participation and the business cycle (2006) Downloads
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