Elasticities of Labor Supply and Labor Force Participation Flows

71 Pages Posted: 14 Jan 2019 Last revised: 1 Apr 2019

See all articles by Isabel Cairo

Isabel Cairo

Board of Governors of the Federal Reserve System

Shigeru Fujita

Federal Reserve Bank of Philadelphia

Camilo Morales-Jimenez

Board of Governors of the Federal Reserve System

Date Written: 2019-01-09

Abstract

REVISED MARCH 2019 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.

Keywords: Labor force participation, labor market transitions, labor supply elasticity, unemployment

JEL Classification: E24, J64

Suggested Citation

Cairo, Isabel and Fujita, Shigeru and Morales-Jimenez, Camilo, Elasticities of Labor Supply and Labor Force Participation Flows (2019-01-09). FRB of Philadelphia Working Paper No. 19-3. Available at SSRN: https://ssrn.com/abstract=3314573 or http://dx.doi.org/10.21799/frbp.wp.2019.03

Isabel Cairo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Shigeru Fujita

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Camilo Morales-Jimenez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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