Equilibrium search unemployment, endogenous participation, and labor market flows

Pietro Garibaldi, Etienne Wasmer

Research output: Contribution to journalArticlepeer-review


The sustainability of welfare states requires high employment and high participation to raise the tax base. To analyze labor supply in a world with market frictions, we propose and solve a macro model of the labor market with unemployment and labor force participation as endogenous and distinct states. In our world, workers' decisions of participating are determined by an entry decision and an exit decision. A calibration of the model improves the usual representations of labor markets, since it quantitatively accounts for the observed flows between employment and nonparticipation. The paper investigates also the effect of payroll taxes and unemployment benefits on participation decisions. Taxes reduce entries and increase exits, whereas unemployment benefits, at a given job-finding rate, raise entries and have ambiguous effects on exits.

Original languageEnglish (US)
Pages (from-to)851-882
Number of pages32
JournalJournal of the European Economic Association
Issue number4
StatePublished - Jun 2005

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance


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