Unemployment, discouraged workers and female labour supply

We develop and implement a model of female participation, labour supply and employment that incorporates both search unemployment and discouraged workers. We show that in an intertemporal environment with fixed costs, search costs, permanent lay-offs and infrequent job arrivals, an adaptation of the standard (two-stage budgeting) approach to modelling hours for the employed remains appropriate. Moreover, this model indicates a clear-cut role for business-cycle variables in a participation equation that controls for expected market wages. Our empirical results indicate that business-cycle variables do indeed play a statistically significant role in such an equation. Our approach also provides a straightforward means of calculating the separate effect of fixed costs and search costs on the participation decision.