HAL will be down for maintenance from Friday, June 10 at 4pm through Monday, June 13 at 9am. More information
Skip to Main content Skip to Navigation
Journal articles

Uncertainty and Labour Force Participation

Abstract : Can an increase in uncertainty generate a fall in labour force participation? This paper supports an affirmative answer to this question. Using a structural vector autoregressive model, I show that: (i) a surge in uncertainty leads to a decrease in participation; (ii) uncertainty shocks account for a considerable proportion of participation fluctuations; and (iii) uncertainty shocks have in recent years contributed non‐marginally to participation variations. To explain these facts, I build a New Keynesian dynamic stochastic general equilibrium model with a frictional labour market, endogenous labour force and stochastic volatility. A model with flexible prices induces the expansionary effects of uncertainty on labour force participation. By contrast, a model with price stickiness can reproduce negative empirical comovements. As firms postpone hiring, the household follows a discouragement effect and responds by reducing the size of the labour force. This paper suggests that in a context of variable labour supply, labour market frictions alone do not suffice to reproduce the negative effects of uncertainty shocks. It also confirms the importance of rigid prices as an amplification mechanism for uncertainty shocks and suggests that the modelling of labour force participation has some implications on the transmission channel of uncertainty.
Document type :
Journal articles
Complete list of metadata

Contributor : Réunion Univ Connect in order to contact the contributor
Submitted on : Monday, January 25, 2021 - 8:51:43 AM
Last modification on : Wednesday, November 24, 2021 - 3:41:26 AM




Idriss Fontaine. Uncertainty and Labour Force Participation. Oxford Bulletin of Economics and Statistics, Wiley, 2020, ⟨10.1111/obes.12392⟩. ⟨hal-03119706⟩



Record views