Endogenous Labor Force Participation, Involuntary Unemployment and Monetary Policy

Yuelin Liu

No 2014-41, Discussion Papers from School of Economics, The University of New South Wales

Abstract: This paper develops a New Keynesian model with search frictions in which generated frictional unemployment is consistent with the time series of involuntary unemployment collected by the U.S. Bureau of Labor Statistics. Thus, it can shed light on the relevant impact of labor market frictions and policy interventions on the observed unemployment about which policy makers and the public are concerned. The data-consistent unemployment is achieved in the model via introduction of partial consumption insurance and an endogenous labor force participation channel. In particular, I find that allowing for endogenous labor force participation greatly improves the model fit for U.S. data. It appears that the price markup shock and matching efficiency shock are the two key driving forces of unemployment fluctuations. Monetary policy that stabilizes the participation gap can be welfare improving.

Keywords: New Keynesian DSGE; Involuntary unemployment; Endogenous labor force participation; Search and matching; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C11 E24 E31 E32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-12
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-mon
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