Worker’s Problem

The classification of unemployment vs. inactivity is completely dictated by an agent’s type. If the agent is not employed and type = u, the agent searches and is classified as unemployed, and if type = n, the agent is classified as out of the labor force that period. Note that as long as sn > 0, the job finding probability An for type n workers will be positive since they can access the labor market without being classified as unemployed, and will move directly to employment if matched.

At the production stage, the type i G {u, n} non-employed worker’s value