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Uncertainty and Labour Force Participation

Author

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  • Idriss Fontaine

    (CEMOI - Centre d'Économie et de Management de l'Océan Indien - UR - Université de La Réunion)

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.

Suggested Citation

  • Idriss Fontaine, 2020. "Uncertainty and Labour Force Participation," Post-Print hal-03119706, HAL.
    • Handle: RePEc:hal:journl:hal-03119706
    DOI: 10.1111/obes.12392
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    Cited by:

    1. Kovalenko, Tim, 2021. "Uncertainty shocks and employment fluctuations in Germany: The role of establishment size," Discussion Papers 119, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    2. van der Wielen, Wouter & Barrios, Salvador, 2021. "Economic sentiment during the COVID pandemic: Evidence from search behaviour in the EU," Journal of Economics and Business, Elsevier, vol. 115(C).
    3. Tim Kovalenko, 2021. "Uncertainty shocks and employment fluctuations in Germany: the role of establishment size," Working Papers 212, Bavarian Graduate Program in Economics (BGPE).

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