On the importance of the participation margin for labor market fluctuations

• Published in: Journal of monetary economics Vol. 72; pp. 64 - 82
• Main Authors: Elsby, Michael W.L., Hobijn, Bart, Şahin, Ayşegül
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.05.2015; Elsevier Sequoia S.A
• Subjects: Business cycles; Economic analysis; Economic fluctuations; Labor force; Labor force participation; Labor market; Labour force; Labour market; Margin accounts; Monetary economics; Recessions; Studies; Unemployed; Unemployment; Worker flows; Labor force participation; Business cycles; Worker flows; Unemployment
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2015.01.004

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. •Labor force participation flows account for 1/3 of unemployment fluctuations.•Spurious transitions induced by reporting error do not appear to drive the result.•Conventional stocks-based analyses miss the result due to a stock-flow fallacy.•Countercyclical labor force attachment among the unemployed is a key explanation