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Heterogeneity, Unemployment Benefits and Voluntary Labor Force Participation

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  • A. Devulder

Abstract

In this paper, I propose a new Keynesian DSGE model with labor market search and matching frictions which replicates the low volatility and the moderate procyclicality of the labor force participation rate, that are observed in the United States at business cycle frequency. That being so,it can also generate large procyclical fluctuations in the vacancy-unemployment ratio. This results from two plausible explanations, namely heterogeneity in households preferences and unemployment benefits. Aggregate movements in the participation rate are also consistent with rational behavior of individual agents. In particular, heterogeneous workers cannot share perfectly their idiosyncratic risk and adopt a consumption allocation arrangement which motivates their participation in the labor market. As a result, both labor force participation and job acceptance are voluntary.

Suggested Citation

  • A. Devulder, 2014. "Heterogeneity, Unemployment Benefits and Voluntary Labor Force Participation," Working papers 493, Banque de France.
    • Handle: RePEc:bfr:banfra:493
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    More about this item

    Keywords

    labor force; involuntary unemployment; new Keynesian DSGE; unemployment insurance; business cycle; job search.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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