Conclusion matching labor flows in search models with labor force participation specifying

This paper illustrates the fundamental tension between stationary distribu­tions of worker types and the matching of labor market flows in models with labor force participation and idiosyncratic transitions. I demonstrate how a single transi­tion process for all workers’ types fails to match the needed composition of types in and out of employment for matching flows. This leads to either counterfactual flows out of employment or the failure to match flows between nonparticipation and unem­ployment. I show that using a separately estimated transition process for employed workers and thus allowing these transitions to depend on employment state allows for the exact matching of labor flows between employment, unemployment, and nonpar­ticipation. The necessity of idiosyncratic transitions to be dependent on employment status is not unique to the specification of a participation margin through any par­ticular mechanism such as search costs or labor market productivity, but rather relies on any mechanism producing the right composition of workers in employment. The fact that separation rates are identical and independent of previous nonemployment state or future nonemployment state leaves the evolution of types in employment to produce a composition of workers that is consistent with these flows. Although the micro data available in the 1996 Survey of Income and Program Participants is not sufficient to clearly identify one particular effect as the reason for these changes, plau­sible interpretations of this state-dependence include attachment to or detachment from the labor force.