Part and Full-Time Employment over the Business Cycle

Abstract

We develop a model that allows us to understand the cyclicality of part and full-time employment. In the model, labor market frictions generate a surplus between workers and firms, who jointly decide whether their employment relationship is best suited for part or full-time work based on match quality shocks and the broader economic environment. Lower acyclical costs cause the surplus of part-time matches to vary less with the business cycle than the surplus of full-time matches. As a consequence, the model is able to generate procyclical full-time employment and countercyclical part-time employment as observed in the data. We also show that ignoring part-time employment understates the impact on employment and inequality of a recession and that subsidizing part-time work is far more effective than increasing unemployment insurance at preventing a labor market downturn.