Labor Market Dynamics with Endogenous Labor Force Participation and On-the-Job Search

Abstract

Studies that incorporate endogenous labor force participation, and search and matching frictions in a real business cycle model nd that this three state model generates counterfactual results: labor force participation is very volatile, unemployment is acyclical and highly positively correlated with vacancies. Based on the evidence that job-to-job flows are large in the U.S. labor market, this paper enriches the three-state model with an on-the-job search mechanism which leads to job-to-job flows. The modi ed model successfully generates countercyclical unemployment and the Beveridge Curve relationship. Quantitatively, business cycle statistics reproduced by the modified are more in line with their empirical counterparts.