Unemployment Insurance, Wage Dynamics and Inequality Over the Life Cycle

Abstract

We estimate life-cycle transition probabilities between employment, unemployment and inactivity for U.S. workers. We assess the importance of each worker flow to account for participation and unemployment rates over the life-cycle. We find that inactivity exit and entry matter, but the empirically relevant margins defy conventional wisdom. High youth unemployment is due to high employment exit probabilities to unemployment, but mostly to inactivity. Low labor force entry probabilities substantially account for low participation and unemployment among old workers. Our results show that labor search models that do not consider inactivity miss on the empirically relevant flows.