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Title: Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows

Author(s): Pietro Garibaldi and Etienne Wasmer

Publication Date: July 2003

Keyword(s): labour supply, search frictions and welfare state

Programme Area(s): Labour Economics

Abstract: The sustainability of Welfare States requires high employment/high participation to raise the tax base and avoid distortions. To analyse labour market participation decisions in a world with market frictions, we propose and solve a three-state macro model of the labour market. We show that workers' decisions of entering into the labour market and exiting from the labour market are fundamentally different in the presence of frictions: irreversible costs paid by workers at the entry level imply that labour supply is determined by two margins, the entry and the exit margins. On the normative point of view, we show that the existence of two margins alters significantly the conventional effects of payroll taxes and unemployment benefits. On the positive point of view, our model rationalizes the existence of most labour market flows and of 'marginally attached workers'. Furthermore, a calibration improves the usual representations of labour markets.

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Bibliographic Reference

Garibaldi, P and Wasmer, E. 2003. 'Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3986