On the importance of the participation margin for labor market fluctuations

Michael W.L. Elsby, Bart Hobijn, Ayşegül Şahin

Research output: Contribution to journalArticle

43 Scopus citations

Abstract

Conventional analyses of labor market fluctuations ascribe a minor role to labor force participation. We show, by contrast, that flows-based analyses imply that the participation margin accounts for around one-third of unemployment fluctuations. A novel stock-flow apparatus establishes these facts, delivering three further contributions. First, the role of the participation margin appears robust to adjustments for spurious transitions induced by reporting error. Second, conventional stocks-based analyses are subject to a stock-flow fallacy, neglecting offsetting forces of worker flows on the participation rate. Third, increases in labor force attachment among the unemployed during recessions are a leading explanation for the role of the participation margin.

Original languageEnglish (US)
Pages (from-to)64-82
Number of pages19
JournalJournal of Monetary Economics
Volume72
DOIs
StatePublished - May 1 2015

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Keywords

  • Business cycles
  • Labor force participation
  • Unemployment
  • Worker flows

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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