Uncertainty, labour force participation and job search

Abstract

This study examines the impact of labour force participation (LFP) on search behaviour and unemployment in response to uncertainty shocks. Using a Bayesian vector autoregression model, this study shows that an increase in uncertainty raises unemployment, lowers inflation and decreases LFP and search intensity. Then, a New Keynesian model that incorporates endogenous LFP and variable search intensity is constructed. Results show that both search intensity and participation are procyclical, which suggests a discouragement effect. However, with habit formation, the wealth effect outweighs the discouragement effect and induces an increase in LFP, resulting in a more significant decline in aggregate search intensity due to the expanded searcher pool. In the exogenous LFP model, search intensity is countercyclical, which dampens the unemployment rate. In the endogenous LFP model, the increased entry of non-participants cancels out the countercyclical search intensity of unemployed workers due to the large number of searchers.