The cyclicality of labor force participation flows: The role of labor supply elasticities and wage rigidity

Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of market transition rates between employment, unemployment, nonparticipation. When interpreted through lens model, cyclical behavior implies that participation margin is strongly countercyclical: household's incentive to send workers falls in expansions. We identify two key channels which delivers this result: (i) procyclical values non-market activities (ii) wage rigidity. The smaller value extensive-margin supply elasticity is, stronger first channel is. Wage rigidity helps because it mitigates increases return work during Our estimated replicates well three states thus stocks, once both features are place.