Endogenous Labor Market Participation and the Business Cycle

50 Pages Posted: 21 Mar 2006

See all articles by Christian Haefke

Christian Haefke

Institute for Advanced Studies (IHS); NYU, Abu Dhabi; IZA Institute of Labor Economics

Michael Reiter

Institute for Advanced Studies (IHS)

Date Written: March 2006

Abstract

Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. 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. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.

Keywords: matching models, labor market participation, labor supply elasticity, time

JEL Classification: E24, E32, J21, J64

Suggested Citation

Haefke, Christian and Reiter, Michael, Endogenous Labor Market Participation and the Business Cycle (March 2006). IZA Discussion Paper No. 2029, Available at SSRN: https://ssrn.com/abstract=892386 or http://dx.doi.org/10.2139/ssrn.892386

Christian Haefke (Contact Author)

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

NYU, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Michael Reiter

Institute for Advanced Studies (IHS) ( email )

Josefstaedter Strasse 39
Vienna, A-1080
Austria

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