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Federal Reserve Bank of Philadelphia
Working Papers
Elasticities of Labor Supply and Labor Force Participation Flows
Isabel Cairo
Shigeru Fujita
Camilo Morales-Jimenez

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.

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Isabel Cairo & Shigeru Fujita & Camilo Morales-Jimenez, Elasticities of Labor Supply and Labor Force Participation Flows, Federal Reserve Bank of Philadelphia, Working Papers 19-3, 09 Jan 2019, revised 25 Mar 2019.
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Keywords: Labor force participation; labor market transitions; labor supply elasticity; unemployment
DOI: 10.21799/frbp.wp.2019.03
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