Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
966767 | Journal of Monetary Economics | 2015 | 19 Pages |
•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
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.