UNEMPLOYMENT, PARTICIPATION AND MARKET SIZE

We construct an equilibrium random matching model of the labour market, withendogenous market participation and a general matching technology that allows formarket size effects: the job-finding rate for workers and the incentives for participationchange with the level of unemployment. In comparison to standard modelswith constant returns to scale in matching, agent behaviour is more complex – themodel generates plausible joint dynamics of employment, unemployment and participationwith heterogeneity in search behaviour for workers with different degreesof attachment to the labour market. Techniques are developed to reduce the dimensionalityof the problem to establish local and global stability; a complicatingfactor is the possibility of multiple equilibria, welfare-ranked by market size. AHosios-type condition internalises search externalities....