PDFDownload paper RWP 18-08, August 2018

We document that labor force participation declines in the short run following a positive technology shock. The countercyclical response of labor force participation to a technology shock contrasts with the well documented mild procyclical behavior of labor force participation in the business cycle. In a search model of the labor market that incorporates a participation choice, we show that a positive technology shock reduces labor force participation in the short run under a reasonable calibration. In the calibrated model, discount factor shocks induce a procyclical response of labor force participation. As a result, the model can generate both the countercyclical response to technology shocks and the procyclical behavior, consistent with the evidence. Our results indicate an important role of nontechnology shocks for explaining labor market fluctuations.

JEL Classification: E24, E32, J22, J64

Article Citation

  • Tuzemen, Didem, Willem Van Zandweghe. 2018. “The Cyclical Behavior of Labor Force Participation.” Federal Reserve Bank of Kansas City, Research Working Paper no. 18-08, August. Available at External Linkhttps://doi.org/10.18651/RWP2018-08

Author

Didem Tüzemen

Senior Economist

Didem Tüzemen is a Senior Economist in the Economic Research Department at the Federal Reserve Bank of Kansas City. Ms. Tüzemen joined the department in July 2011 after earning h…