Job Competition between the Unemployed and Non-Participants

This paper considers labour supply and demand shocks in a simple flow model of the labour market. We consider the propagation of these shocks in a matching model with competition between various groups of job seekers. By way of simulations we explore the extent of labour market hysteresis arising from competition between unemployed job seekers and job seekers outside the labour force. The simulation model is based on an estimated aggregate matching function. We find that the extent of hysteresis depends very much on the way labour demand reacts to labour supply. Competition from non-participants in the search for jobs softens the impact of demand shocks upon the unemployed. JEL codes: J64, J65, J68, E24, E27