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Labor Force Participation, Wages and Turbulence
Labor force participation among prime-age men has decreased over the last three decades in the U.S. and it coincides with wage stagnation and declining return to tenure for this demographic group. We develop a search and matching model of the labor market in which participation decisions of the workers are likely to change their skill level through on-the-job learning and through deterioration during non-employment. We use this framework to quantitatively assess the implications of an increase in the probability of skill loss during non-employment spells ‘turbulence‘, after Ljungqvist and Sargent, 1998). We find that the increase in turbulence not only provides a rationale for the decline in participation, but it is also consistent with the reduction in the return to tenure observed in the data.
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