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On the importance of the participation margin for labor market fluctuations

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

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.

Suggested Citation

  • Elsby, Michael W.L. & Hobijn, Bart & Şahin, Ayşegül, 2015. "On the importance of the participation margin for labor market fluctuations," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 64-82.
    • Handle: RePEc:eee:moneco:v:72:y:2015:i:c:p:64-82
    DOI: 10.1016/j.jmoneco.2015.01.004
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