Working Paper

The Cyclical Behavior of Labor Force Participation


Abstract: We document that labor force participation declines in the short run following a positive technology shock. The countercyclical response of labor force participation to a technology shock contrasts with the well documented mild procyclical behavior of labor force participation in the business cycle. In a search model of the labor market that incorporates a participation choice, we show that a positive technology shock reduces labor force participation in the short run under a reasonable calibration. In the calibrated model, discount factor shocks induce a procyclical response of labor force participation. As a result, the model can generate both the countercyclical response to technology shocks and the procyclical behavior, consistent with the evidence. Our results indicate an important role of nontechnology shocks for explaining labor market fluctuations.

Keywords: Labor Force Participation; Unemployment; Technology Shocks; Discount Factor Shocks;

JEL Classification: E24; E32; J22; J64;

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Description: https://doi.org/10.18651/RWP2018-08

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2018-08-01

Number: RWP 18-8

Pages: 30 pages