Heterogeneity, Unemployment Benefits and Voluntary Labor Force Participation

In this paper, I propose a new Keynesian DSGE model with labor market search and matching frictions which replicates the low volatility and the moderate procyclicality of the labor force participation rate, that are observed in the United States at business cycle frequency. That being so,it can also generate large procyclical fluctuations in the vacancy-unemployment ratio. This results from two plausible explanations, namely heterogeneity in households preferences and unemployment benefits. Aggregate movements in the participation rate are also consistent with rational behavior of individual agents. In particular, heterogeneous workers cannot share perfectly their idiosyncratic risk and adopt a consumption allocation arrangement which motivates their participation in the labor market. As a result, both labor force participation and job acceptance are voluntary.