DP7425 A Three State Model of Worker Flows in General Equilibrium

Author(s): Per Krusell, Toshihiko Mukoyama, Richard Rogerson, Aysegul Sahin
Publication Date: August 2009
Keyword(s): Labor Market Frictions, Labor Supply, Taxes
JEL(s): E24, J22, J64
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7425

We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor with idiosyncratic shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.