Gross Worker Flows over the Business Cycle

We build a hybrid model of the aggregate labor market that features both standard labor supply forces and frictions in order to study the cyclical properties of gross worker flows across the three labor market states: employment, unemployment, and nonparticipation. Our goal is to assess the relative importance of frictions and labor supply in accounting for fluctuations in labor market outcomes. Our parsimonious model is able to capture the key features of the cyclical movements in gross worker flows and indicates an important role for both frictions and labor supply. This paper was previously entitled “Is labor supply important for business cycles?”. We thank Gadi Barlevy, Michael Elsby and Marcelo Veracierto, in addition to seminar and conference participants at the Asian Meeting of the Econometric Society (2011), Atlanta Fed, Chicago Fed, Minneapolis Fed, HEC Montreal, Hitotsubashi Macro Econometrics Conference, Federal Reserve Board, National University of Singapore, Search and Matching Network Conference (2011), NBER Summer Institute (2011), NBER Conference on Macroeconomics Across Time and Space (2011), SED (2011), Oslo University, Norges Bank, European University Institute, Bank of Korea, St. Louis Fed, San Francisco Fed, NBER Economic Fluctuations and Growth Meeting (2011), University of Pennsylvania, University of Tokyo, and University of Washington for useful comments. We thank Joe Song for excellent research assistance. Krusell thanks the NSF for financial support, Mukoyama thanks the Bankard Fund for Political Economy for financial support, and Rogerson thanks the NSF and the Korean Science Foundation (WCU-R33-10005) for financial support. The views expressed in this paper are solely the responsibility of the author’s and should not be interpreted as reflecting views of the Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, or of any other person associated with the Federal Reserve System. Corresponding author: Richard Rogerson, Woodrow Wilson School, Princeton University, Princeton, NJ 08544; 609-258-4839, [email protected]. IIES, CAERP, CEPR, and NBER Federal Reserve Board and University of Virginia Princeton University and NBER Federal Reserve Bank of New York