Equilibrium labor force participation and the business cycle

We develop an equilibrium model of labor force participation to examine the labor market business cycle. The model remains agnostic about unemployment inflows and outflows, modeling these flows with a structural moving average representation derived from a factor-augmented VAR model. Estimating the augmented DSGE model on data for the United States, we identify the structural shocks and parameters driving business cycle fluctuations, avoiding misspecified job-finding and separation rates. Our results show that real wage rigidities play a minor role, labor force participation is mildly procyclical, and transitions between employment, unemployment, and non-participation are strongly cyclical.