On the Importance of the Participation Margin for Market Fluctuations

Authors

Michael Elsby

Bart Hobijn

Aysegül Sahin

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2013-05 | February 1, 2013

Conventional analyses of cyclical fluctuations in the labor market ascribe a minor role to the labor force participation margin. In contrast, a flows-based decomposition of the variation in labor market stocks reveals that transitions at the participation margin account for around one-third of the cyclical variation in the unemployment rate. This result is robust to adjustments of data for spurious transitions, and for time aggregation. Inferences from conventional, stocks-based analyses of labor force participation are shown to be subject to a stock-flow fallacy, neglecting the offsetting forces of worker flows that underlie the modest cyclicality of the participation rate. A novel analysis of history dependence in worker flows demonstrates that a large part of the contribution of the participation margin can be traced to cyclical fluctuations in the composition of the unemployed by labor market attachment.

Article Citation

Sahin, Aysegül, Bart Hobijn, and Michael Elsby. 2013. “On the Importance of the Participation Margin for Market Fluctuations,” Federal Reserve Bank of San Francisco Working Paper 2013-05. Available at https://doi.org/10.24148/wp2013-05