Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?

TLDR

The study tests whether the labels “unemployed” and “out of the labor force” represent behaviorally distinct states. The authors analytically show that a log‑concave wage‑offer distribution makes unemployment exit rates rise with job‑offer arrival rates. The hypothesis is rejected; distinct behavioral equations govern transitions from unemployment and from out of the labor force to employment, and the results are consistent with search theory that views unemployment as a state facilitating job search.

Abstract

This paper tests the hypothesis that the classifications "unemployed" and "out of the labor force" are behaviorally meaningless distinctions. This hypothesis is rejected. Distinct behavioral equations govern transitions from out of the labor force to employment and from unemployment to employment. The evidence reported in this paper is broadly consistent with versions of search theory in which unemployment is a state that facilitates the job search process. In an Appendix, we demonstrate that log concavity of the wage-offer distribution implies that the exit rate from unemployment is an increasing function of the rate of arrival of job offers.