The Life-cycle Profile of Worker Flows in Europe
with Etienne Lalé (UQAM, CIRANO and IZA)
Abstract: This paper provides a comprehensive account of the relationship between cross-country differences in aggregate employment and disaggregated differences in worker flows along the life cycle. We use survey micro-data for 31 European countries, and estimate the life-cycle profiles of transition probabilities across employment, unemployment and nonparticipation for each country. We develop a decomposition measuring the contribution of these transition probabilities to aggregate employment differences. We show, first, that separations from employment play a larger role than entries into employment; and, second, that life-cycle variation in worker flows is more important that cross-country variation in explaining this pattern. To go beyond description, we develop a life-cycle model with search frictions, an operative labor-force participation margin, and labor market institutions (unemployment insurance benefits and employment protection legislation). Certain preference and technology parameters depend on workers’ age, allowing the model to reproduce the life-cycle profiles of transition probabilities across employment, unemployment and nonparticipation observed in the data. We quantify how much of the life-cycle variation of flows is coming from preferences, technology, and most notably from labor market institutions, which are age-independent but whose effects on worker flows vary substantially over the life cycle.